S&P Revises Monetary Score Criteria in Sovereign Ratings Update

Standard & Poor’s updated its sovereign rating methodology, giving reserve currency status its highest monetary score.

Countries with a reserve currency receive the strongest score under the company’s monetary criteria category, one of five the largest credit rater examines to rank sovereign nations, the New York-based unit of McGraw Hill Financial Inc. (MHFI) said in a June 24 report. The top spot was previously defined as floating currencies. The reserve currency status was already considered under a separate category.

S&P stripped the U.S. of its top credit rating in August 2011, sending prices on the debt to all-time highs. IntercontinentalExchange Inc.’s U.S. Dollar Index, which measures the greenback against the euro, yen, pound, Swiss franc, Canada dollar and Swedish krona, has risen 11 percent to 82.951 since the downgrade. The currency gauge may rise to 85.2 by the end of the year, according to the median forecast of economists and strategists surveyed by Bloomberg.

The report is part of S&P’s “regular review process,” the company said in a statement. The changes aren’t expected to change existing ratings.

In the new criteria, S&P also renamed its “political risk” category “institutional and governance effectiveness risk.”

In downgrading the U.S., S&P cited a political stalemate in Washington over raising the nation’s debt limit and political fighting that made it less confident Congress would end tax cuts enacted under President George W. Bush or tackle entitlements programs, such as Social Security and Medicaid.

Stable Outlook

S&P boosted its U.S. rating outlook to “stable” from “negative” on June 10, meaning the U.S. has a less than one-in-three likelihood of a downgrade in the “near term” with the revision, it said.

The company said it sees “tentative improvements,” such as the deal politicians reached to resolve the so-called fiscal cliff of automatic spending cuts and tax increases and through the Budget Control Act of 2011.

The dollar has risen and Treasuries have fallen as the Federal Reserve signaled this month that it may reduce bond purchases this year designed to reduce borrowing costs and boost asset prices.

Yields (USGG10YR) on 10-year Treasuries were at 2.54 percent in New York yesterday, compared with 2.4 percent the day before S&P stripped the U.S. of its AAA rating on Aug. 5, 2011.

Attempting to predict the market consequence of a rating change has proven to be little different than flipping a coin. Yields on government securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg on Moody’s Investors Service and S&P grades.

Bond markets shouldn’t be expected to react when a country’s credit rating is changed because the yield of sovereign debt reflects more than just the credit risk on which rankings hinge, according to a May 15 report from Fitch Ratings.

To contact the reporters on this story: Matt Robinson in New York at mrobinson55@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Dave Liedtka at dliedtka@bloomberg.net

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