Stand by for a flood of downgrades and other ratings changes linked to Russia’s invasion of Ukraine from the big three ratings agencies – S&P Global, Moody’s and Fitch.
While the likes of Australia and Canada shouldn’t see a ratings change – more like a reaffirming of their current AAA stable top levels – other nations and their companies, especially in Europe and especially banks will come under pressure, especially where the western sanctions on Russia are concerned.
The relative strength of the Aussie dollar since the invasion – it is higher not lower as it was early on in 2020 in the first leg of the pandemic – tells us global investors think Australia (along with Canada) will benefit from the Putin’s invasion of Ukraine and all the private and financial pain that is flowing from that decision.
New Zealand’s AA+ rating should also be OK, as will Singapore.
If you had to pick sectors likely to be subject to revisions or ratings mention from Moody’s, then choose airlines, gas and electricity companies anywhere in Europe, oil companies, car companies and financiers tied closely to these sectors.
Moody’s points out that big global non-financial companies (say food, consumer goods and consumer electronics) should not be hit hard because their Russian businesses are usually ‘modest’ as a share of overall revenue and earnings.
Russia, Belarus and Ukraine ratings have been slashed and those companies from each of the three countries with ratings set by Moody’s (and others) will be cut in coming days if they haven’t been dropped already.
The re-ratings to watch for will be in Europe and a key determinant will be proximity to Russia and Ukraine and dependence on Russia and Ukraine for key commodities such as oil, gas, nickel, copper, gold, wheat, canola, sunflower oil, corn, palladium and neon.
Britain, Poland, Germany, Hungry, Italy, Spain, Belgium, Netherlands, Portugal, France, Sweden and the Baltic states will all have their ratings re-evaluated.
Of these Germany (AAA), Sweden (AAA) Netherland (AAA), France (AA) and Britain (AA) could be at risk because they have become involved in the war in some way – supplying arms
Moody’s has kicked off the process with a statement (and long discussion) of the possible impact the invasion, the western sanctions and big movements in commodity prices could have on credit ratings of government, semi government and corporate debt issuers.
Moody’s says it expects to start releasing new analysis and credit ratings shortly and there are reports that Fitch and S&P Global will be doing the same in the next week or so.
“We are assessing the susceptibility of rated issuers and transactions to rising risk, “Moody’s said in the analysis of the possible fallout from the invasion of Ukraine by Russia.
“Current events are fast moving and highly unpredictable, with some events already evolving well outside of the range of our previous expectations and having potential for further severe spillovers and consequences. To incorporate these risks into our credit analysis, we are maintaining the analytic approach we take when an event suddenly and materially changes credit conditions.
“…the escalating international response through government sanctions and business suspensions are creating new security, economic and financial risks around the world.
“These developments are also exacerbating existing inflationary pressures and supply chain disruptions, tilting growth trends toward the downside.
“As geopolitics adds risks to the credit landscape, we are employing our established analytic process to incorporate these risks into our credit assessments.”
“Similar to our response to the shock following the onset of the COVID-19 pandemic, we are conducting our risk assessments consistently across regions and sectors, analyzing how debt issuers’ credit profiles will evolve through a period of heightened volatility, incorporating both their exposure to the risks and the buffers they have to mitigate this exposure.
“Our approach also considers the likely actions that rated entities will take to minimize the impact of negative shocks on their credit profiles, and potential policy support that may be extended to them during the period of crisis.
“In line with that approach, we are re-evaluating our baseline macroeconomic expectations, including our assumptions around commodity prices, supply shocks, financial volatility and business disruptions.
“We are also considering an alternative risk scenario in which the risks escalate even further and the negative shocks are more severe and longer lasting. These scenarios allow us to consider the range of potential outcomes in a very uncertain credit climate, and how they could be reflected in credit metrics.”
Moody’s said that (debt) issuers will be assessed on their relative exposure to one or more of the three channels of risk – “commodity price shocks, financial disruptions and volatility, and security risks”.
“… we are in the process of categorizing sectors and debt issuers as having high, moderate or low exposure to rising risks. Those with high exposure could potentially face significant weakening of their credit profiles in our baseline macroeconomic scenario.
“Those with moderate exposure are less exposed, but could face significant risks if the alternative risk scenario were to crystallize. Those with low exposure face more limited impact on their credit profiles, either because they are insulated from all three channels or have very significant buffers.
“In instances in which we have found that the Russia-Ukraine conflict already has materially altered credit profiles, we have taken rating actions to reflect these changes.
“Most of these rating actions have been on issuers based in Russia or Ukraine. We have also taken rating actions on a few other issuers with significant direct exposure to the fallout from the crisis.
“However, we do not expect credit risks to remain contained to entities based in Russia or Ukraine. We continue to monitor global spillovers of the crisis and assess how they are affecting sector and issuer credit quality to ensure that our ratings are positioned appropriately.”
Given this background we can expect that countries such as Australia, Canada and South Africa as big commodity producers should retain their current ratings – Canada and Australia are AAA stable for example.
The US should, but seeing it is the leader of the anti-Putin group, rating groups may raise an eyebrow or two. But the primacy of the US dollar and US dollar debt (T-Bonds) as safe havens for worried investors has been reaffirmed by the markets since the invasion in late February.
Likewise AAA rated Switzerland, Luxembourg and Singapore could be OK – though being in Europe, the first two might also see a qualifying eyebrow raised in any ratings updates.
For Australia, though, some resource companies might actually see a small upgrade – especially the likes of Woodside, Santos, BHP, Rio Tinto and OZ Minerals – because the commodity outlook has strengthened.
The higher commodity prices should mean an improvement in our terms of trade and higher nominal GDP growth and tax revenues (helped by higher inflation). That should aid budget deficit reduction which usually keeps the likes of Moody’s nice and cheery.
As well, the recent retreat back to Australia from Asia and internationally by Australia’s big four banks, should be a small positive especially if the three ratings groups start fretting about the impact of losses by investors in Russia/Ukraine debt.
A reported $US170 billion (most media reports) might be lost with giant global investors and already perhaps the biggest of them all, US group, BlackRock is looking like its $US18 billion has mostly evaporated.
Big oil groups like BP, Shell, Exxon, Total face over $US50 billion in losses in quitting Russia and big European banks like BNP, UniCredit and Deutsche Bank could also be facing losses or write downs in the billions that may in turn impact their credit ratings.
This is where the significant ratings changes could pop up. Big holders of US dollar and other foreign currency debt are facing possible large losses.
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Meanwhile the International Monetary Fund’s (IMF) head believes it is no longer ‘improbable’ that Russia will default on its debts.
But IMF Managing Director Kristalina Georgieva said in a US TV interview on Sunday that any default by Russia would not trigger a global financial crisis.
She told CBS’s Face the Nation program that sanctions imposed by the United States and other democracies were already having a “severe” impact on the Russian economy and would trigger a deep recession there this year.
The war and the sanctions would also have significant spillover effects on neighbouring countries that depended on Russian energy supplies, and had already resulted in a wave of refugees compared to that seen during World War Two, she said.”
The sanctions were also limiting Russia’s ability to access its resources and service its debts, which meant a default was no longer viewed as “improbable,” Georgieva said.
Last week, the World Bank’s chief economist, Carmen Reinhart warned that Russia and its ally Belarus were “mightily close” to default and when asked if such a default could trigger a financial crisis around the world, she said, “For now, no.”
The total exposure of banks to Russia amounted to around $US120 billion, an amount that while not insignificant, was “not systemically relevant,” The IMF head said.
A default would see the likes of Moody’s Fitch and S&P global make further adjustments to their ratings for big banks with Russian loans. A default would also hit any future trade finance deals in the event of a ceasefire or easing of the war.
Asked if Russia could access the $1.4 billion in emergency IMF funding approved for Ukraine last week if Moscow won the war and installed a new government, Ms Georgieva said the funds were in a special account accessible only by the Ukrainian government.
Ms Georgieva last week said the Fund would trim its 2022 global growth forecast of 4.4% as a result of the war, but said the overall trajectory remained positive.
Growth remained robust in countries like the US that had been fast to recover from COVID-19 pandemic.
China’s new problems with Covid have only just emerged in recent days (see separate story).
The impact of the Russian invasion of Ukraine would be most severe in terms of driving up commodity prices and inflation, potentially leading to hunger and food insecurity in parts of Africa, she added.
In a separate report, Russia said on Sunday that it was counting on China to help it withstand the blow to its economy from sanctions, but the US has warned not to provide this support and there have been other reports that Russia wants China to provide military aid.
The Russian finance minister, Anton Siluanov, said Moscow was unable to access $US300 billion of its $US640 billion in gold and foreign exchange reserves, part of which was in Chinese yuan. he didn’t say how much or if there had been a request to the Chinese to do a deal on those reserves.
Russia is due to make two interest payments on Wednesday, March 16. However, it will have a 30-day grace period to make the coupon payments.
