US Downgrade vs. Other Weak AAA Credits

Here is Brown Brothers Harriman on the S&P downgrade:

“With the US downgrade now out of the way, we think market attention will swing back to other DM countries that are facing downward pressure on ratings too. Here is a summary of our most recent ratings outlooks for DM.

Our model has the US as a weak AAA/Aaa/AAA credit, and we did not think that the downgrade was entirely justified on fundamental grounds. Our model gives the US score a small boost due to the dollar’s standing as the world’s reserve currency. Taking that out drops the US down to AA+/Aa1/AA+, but at this juncture, we see no end to the dollar’s premiere status. However, now that the move has been made, it brings into question other AAA ratings.

Lastly, we note that the supply of true AAA credits is dwindling. In Europe, there is still Germany, but we believe that as it takes on more and more countries to backstop, Germany’s debt ratios and fundamentals will deteriorate too. Now, it is a solid AAA credit, but the future is not so bright. The dollar bloc, the Scandinavian countries, and Switzerland are left as very solid AAA countries, along with the Netherlands and Luxembourg. But taken together, these countries are a very small slice of global GDP and so investors have few options with regards to AAA safe havens.”

The table below shows current AAA countries:


Source: Bloomberg, Brown Brothers Harriman

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