Ratings, Who Next?

News that S&P had put the US on credit watch saw some hand wringing and chin wagging, but the investor class did not sell US Treasuries.  As noted previously, just before that Fitch had put China's local long term debt on credit watch for possible downgrade and it went unobserved and uncommented on by many.  Before the weekend as the euro was already under some pressure after having tested important resistance near $1.4350, Fitch cut Greece's debt rating by three notches and had a negative outlook. 

While the market and policy makers are focused on Greece, Italy and Portugal, developments are taking place outside those countries that are important for medium term investors.  Spain is holding elections today and as I have argued, the new regional governments that are likely to be elected are bound to claim that the deficits/debt that they are inheriting are larger than previously acknowledged.

On May 21, S&P cut the outlook for Italy's A+ long-term rating.  It cited slow economic growth, diminished prospects for a reduction of government debt and the failure to adopt structural reforms.  While discussions of the European debt crisis identify Spain as too big to rescue, Italy is even larger.  

The next European sovereign debt rating to be cut could very well be in the core not the periphery.  Earlier this year, S&P indicated that if Belgium, which held elections in July 2010 did not have a government in place by mid-June it would cut its rating.  Belgium's debt burden (% of GDP) is higher than Ireland's before it nationalized private debt and Portugal's and Spain's.