The New World Order of Global Sovereigns: When Corporations Have Better Credit Ratings

By EconMatters

Our interactive graphic shows how deeply in hock we all are

THE headlines are all about sovereign debt at the moment. But that is only part of the problem. Debt rose across the rich world during the boom, from consumers maxing out credit cards to financial firms taking on more leverage, and the process of reducing it is still at a very early stage.

The interactive graphic above shows the overall debt levels for a wide range of countries, based on data supplied by the McKinsey Global Institute. In theory there is no maximum level for debt relative to GDP, but Ireland and Iceland (not on this map) found the limit in practice when they hit eight-to-ten times GDP.

The debt is also broken down by sector. Note the huge size of Britain’s banks relative to its economy, and the high level of Spanish corporate debt. Note, too, Japan's vast amount of government debt, not yet a problem but an obvious reason for jitters over the longer term.

Japan has the dubious distinction of topping our sovereign-debt vulnerability ranking below, which orders countries based on their primary budget balance, their debt-to-GDP ratio and the relationship between the yield on their debt and economic growth (if the former is larger than the latter, the debt burden is getting steadily worse). Britain does badly, too, although a tough austerity programme and the long duration of its outstanding debt protect it from a loss of confidence. Here’s the table:

The U.S. debt ceiling political soap has finally come to an end. With the debt deal done, the U.S. has dodged a major bullet of a debt default, but may not be out of the woods yet for a sovereign credit downgrade. Nevertheless, regardless whether one or more of the Big 3 agencies (S&P, Moody's and Fitch) would really deal a downgrade to the U.S., it is the markets that holds the key to a sovereign's credit worthiness based on its ability to manage a balanced budget, implementing proper monetary and fiscal policies. From that perspective, the markets probably have already spoken.

A Reuters analysis discusses that typically the sovereign -- the government -- is seen as the most solvent entity in the country, but with a number of governments face bigger risks of downgrades or defaults, some multinational corporations are enjoying higher cash flows, and set to benefit from higher ratings than their sovereigns.

According to Reuters, in the United States, the cost of insuring the debt (i.e. CDS or credit default swap) of Automatic Data Processing (ADP), Exxon Mobile (XOM), Johnson & Johnson (JNJ) and Microsoft (MSFT) against default on a five-year horizon is at least 20 basis points lower than that of the U.S. government (See Chart) All four U.S. companies boast triple-A ratings, the same as the U.S. government, but S&P has said that a change in the U.S. sovereign credit rating or outlook will not affect these four corporations.

Moreover, a New World Order has emerged for the global sovereigns, as Reuters reports,

"Globally, 107 corporate and local governments have higher ratings than those of the sovereign in their country of domicile on a foreign currency basis, Standard & Poor's says. That means these entities are seen as likely to be able to cover their debt obligations even when the central government of the country they are based in cannot."

"Balance sheets of OECD countries will continue to deteriorate. You're looking at a medium to long-term credit downgrade cycle over the next five years," said [Ashok] Shah [chief investment officer of London & Capital.]

Indeed, with a whopping $76.2 billion in cash and marketable securities, Apple (AAPL) now has more cash than the U.S. government. Some jokingly said the U.S. government could ask Steve Jobs for a loan and that Uncle Sam should start selling iPads. These might seem like jokes for the time being, but they also might have foretold things to come in the relationship between corporations and their respective domiciles, and the changes in government entity structure where sovereign may operate more like a business.

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