The FINANCIAL — Fitch Ratings says sovereigns that have experienced multiple rating downgrades take an average two years to reach the ratings trough and have a high likelihood of suffering further downgrades. However, strong rating revivals are possible once countries turn the corner on to a recovery path.
Fitch analysed 37 episodes of sovereign 'rating crises' over 1997-2017 in which there were at least three notches of downgrades within three calendar years. In such crisis cases, the average downgrade was 5.8 notches. Three-quarters of countries suffering three rapid downgrades had at least one further downgrade.
The sovereign suffering the greatest number of notch downgrades was Greece (2009, year of first downgrade) with a total of 14, followed by Korea (1997) and Cyprus (2011) each with 12. Eleven of the episodes resulted in defaults on the Long-Term Foreign Currency ratings.
While the average time taken to reach the ratings trough (the last downgrade) was two years after the year of the first downgrade (eg first downgrade in 2008, trough in 2010), seven countries hit the bottom very quickly in the year of the initial downgrade. The longest down-cycle is eight years for San Marino (from 2009 to 2017).
Every country where the crisis started before 2008 has recovered at least one of its lost rating notches. Ten have now fully recovered. The average recovery was 5.2 notches in the 10 years after the start of a crisis. Korea (1997) has achieved the greatest ratings revival within the 10 years following a crisis, recovering 11 out of 12 lost notches. Uruguay (2012) and Russia (1998) also had very strong recoveries.
Of the 23 still Fitch-rated sovereigns hit by rating crises since 2007, 15 sovereigns have already benefited from at least one upgrade. Of non-defaulting countries, the strongest recoveries have been in Iceland (2007) and Latvia (2007) with four notches, followed by Cyprus (2011) with three notches, and Lithuania (2008) and Ireland (2009) with two. Iceland (A-), Greece (B-), Spain (BBB+), Portugal (BB+) and Cyprus (BB-) are all on Positive Outlook, signalling further upgrades are likely.
Seven of the countries were downgraded again in 2016 or 2017 and have not necessarily reached a ratings trough. Of those, Bahrain (BB+), Brazil (BB) and Suriname (B-) are on Negative Outlook, signalling a further downgrade is more likely than not. El Salvador does not have an Outlook as it is rated 'CCC', while Mozambique remains in default.
Rating recoveries are not necessarily unidirectional: Venezuela (2002), Jamaica (2008), Greece (2009) and Republic of Congo (2016) all suffered further downgrades after an initial upgrade, with Jamaica and Congo defaulting a second time.
The average downgrade for developed markets (DMs) was 7.6 notches exceeding the 5.1 notches for emerging markets (EMs), partly reflecting higher starting points and the extreme shock of the eurozone crisis. DMs have also been slower to recover from rating crises than EMs. Rating recoveries are slower where a crisis leaves a legacy of high public or external debt, sizeable bad debt in the banking system or enduring political fault lines.