July 8, 2020 / 1:42 PM / a month ago

Coronavirus tipping sovereign rating balance into junk - Fitch

* Record number of credit rating cuts in last six months

* More countries to be junk than investment grade for first time

* Global debt-to-GDP to hit 95%, has doubled over last decade

By Marc Jones

LONDON, July 8 (Reuters) - The record number of sovereign credit rating downgrades caused by the coronavirus will for first time leave more countries in the riskier “junk” category than the investment grade bracket, Fitch predicted on Wednesday.

The crisis has already seen Fitch take 32 negative rating actions affecting 26 countries this year, but with more than a third of its 118 sovereign grades still carrying “negative outlook” downgrade warnings the numbers are expected to jump further.

It is also set to tip the balance between the fiscally stronger countries in the triple-A to BBB- “investment grade” band, and those with weaker finances in the junk, or “speculative grade” category, as it is also known.

“Five sovereigns rated ‘BBB-‘ are on Negative Outlook, suggesting speculative grade ratings will soon outnumber those in investment grade for the first time,” Fitch’s top sovereign analysts, James McCormack and Tony Stringer, said in a report.

Becoming a “fallen angel” - as a downgrade to junk is known in rating agency parlance - can set off a wave of problems.

It automatically excludes the country’s bonds from certain high-profile investment indexes, which means conservative funds - active managers as well as passive “trackers” - are no longer able to buy and sell them. It can push up borrowing costs and cut the bonds’ value as collateral at central bank funding operations too.

Countries teetering on the brink for Fitch are Colombia, India, Morocco, Romania and Uruguay. Italy and Mexico, which have two of the biggest bond markets in the world, are on BBB- too, although the ratings currently have “stable” outlooks.

There is no region in the world with less than five sovereigns on a negative outlook. In Latin America and the Middle East & Africa the numbers are in double digits and Fitch sees severe and lasting damage to globally.

It estimates the virus will leave a global fiscal deficit of $9.7 trillion this year, which is around 12% of world GDP. Overall debt is expected to reach $76 trillion - 95% of world GDP - and would be more than double the $34 trillion it stood at before the 2007-08 financial crisis.

Relative rating volatility – measured by the number of rating changes on a 12-month trailing basis per 100 sovereign ratings – was also likely to exceed its all-time high later this year, McCormack and Stringer said.

Reporting by Marc Jones; Editing by Alex Richardson

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