Question in Credit Ratings Debate: Is Italy Even Sicker Than Spain?

Photographer: Alessia Pierdomenico/Bloomberg

Italian regional officials protest spending cuts. If BlackRock is right, Italy must cut much more.

Just how badly is Italy teetering? By the standards of the credit rating agencies, Standard & Poor’s and Moody’s Investor Service, things aren’t so dire. Despite Prime Minister Mario Monti’s resignation today and Silvio Berlusconi’s efforts to return to power after a tax fraud conviction, S&P’s credit rating remains at BBB+.

If you trust the world’s biggest money manager, BlackRock Inc., Italy’s situation is a lot worse. In a balanced story about credit ratings today, Bloomberg’s Sebastian Boyd and Ye Jie write about BlackRock’s distrust of government bond ratings and the company’s own alternate gauge of credit risk .

As Boyd and Jie write, BlackRock thinks the ratings agencies have been ‘very, very slow to the game.’ The agencies, for their part, say that they’ve been consistently right on sovereign ratings over the long run.

Admirably, BlackRock has made public its own sovereign debt rankings, and you can download the rankings from their website. For The Market Now what really jumps out in BlackRock’s reports is that BlackRock places Ireland and Italy near the very bottom of the sovereign rankings. From BlackRock’s first report, in June 2011, to the most recent public one, these two countries consistently ranked below Spain and Argentina. That’s the reverse of Moody’s and S&P’s views.

At a glance, it looks like BlackRock may be attaching more importance than the ratings agencies to the debt-to-GDP ratio: 121% for Italy and 106% for Ireland at the end of last year, and certainly higher now (graphic above). BlackRock seems to attribute less importance to the political environment and historical background. Japan, which also has high debt relative to its GDP, also does badly in BlackRock’s rankings.

For TMN, it would be surprising if Moody’s and S&P have it backwards here and Italy defaults while Spain does not, or even more surprising if Argentina pays its debts and Ireland doesn’t. But then, that’s the point. If BlackRock does turn to be right here, it’ll be powerful evidence that the credit agencies are making mistakes in their rankings. The really scary part: in that scenario Europe will have much, much more pressing worries than arguing over sovereign ratings.


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