U.K. Lost Its AAA Credit Rating - Just Ignore This Fact

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Includes: DIA, QQQ, SPY
by: Bull and Bear Investor

Summary

Sovereign credit rating downgrade from AAA is usually too late, as history tells us.

Rating lowering typically shows that the economy is weakened, when everybody already knows it.

Unlike before, UK’s AAA -> AA is based on forecasted events, not actual economic decline.

Nevertheless, ignore this and other future UK credit rating lowering.

Introduction. Last week S&P and Fitch lowered UK's AAA rating. Does it mean anything for the US market? To put this question more general, "Does it matter when a Western World country is no longer a top class borrower?"

History of AAA rating downgrade. Let us look back to history and see Fitch in 1994-2012. It would be ideal to take all Top Three rating agencies for a maximum possible period, but that data is hardly available (please, tell me if you know where to take it from). Still, taking 1 agency is acceptable, because they frequently repeat each other's decisions or, at least, monitor their peers carefully. As for the time frame, 18 years is sufficient to see notorious examples.

So, there were only 3 events of countries losing its AAA rating by Fitch.

1) Japan on September 21, 1998.

By that date Japanese economy had been declining for 4 consecutive quarters. In general, it was a period after bubble, unemployment reached highs, consumption was low, investments were low, many corporate debt risks soared etc. Probably, such credit rating lowering by Fitch did not surprise anyone. Maybe, there were reasons why to remove one of three "A" letters at that particular moment and not the other. But I find it more likely that the rating agency just stated the obvious and was actually late in doing so.

There is no impact of Japan losing its AAA Fitch rating on US stock market Click to enlarge

I do not see any impact here. So, the US market (NASDAQ: QQQ), (NYSEARCA: DIA), (NYSEARCA: SPY) merely neglected rating decision.

2) Ireland on 8 April, 2009.

Quite obviously, Ireland's performance was a part of a Global Financial Crisis 2008-2009. The problem was that real estate prices were falling, and many corporations were insolvent. In addition, debt was surging and government revenues were plunging.

No appart impact of credit rating of Ireland Click to enlarge

Again, US stock market ignored it, and Fitch just stated the fact that global economic turmoil has engulfed Ireland.

3) Spain on 28 May, 2010.

Spain had a budget deficit, and efforts to reduce it would mean less money for the economy, thus lowering chances of further grows. It was going to be a self-enforcing mechanism. Combine all that with high unemployment, no wonder why they lost a highest possible rating.

S&P did not change when Spanish sovereign credit rating was changed from AAA to AA Click to enlarge

At this time again, if we remove a rating downgrade date, it will be hard to find when it was. And again, the rating agency just said the evident thing.

Rating agencies say obvious things

Conclusion. Rating agencies, when downgrading sovereign credit rating, typically state the obvious, and the [US] stock market doesn't react. If rating agencies evaluated personal health, they would give AAA to 20-years old and, when they turn 80, reduce it, saying "We forecast the health to continue declining". The case of Brexit was different: there were no preceding trends of British economic fall (don't count several days); S&P and Fitch merely reacted on what they thought would be referendum's outcome. Credit rating is a small event in comparison with Brexit itself and other events, which this article does not attempt to discuss. But AAA-> AA will not have any effect on the market. So, if Moody's also downgrades Britain, simply ignore it.

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The material presented in this article is provided for informational purposes only and is based upon information that is considered to be reliable.