It has not been pretty this year for government debt.
There were 15 downgrades of sovereign debt in the first half of 2016, said credit rating agency Fitch Ratings, nearing the highest total of downgrades for a year.
In 2011, there were a record 20 downgrades for the entire year.
According to a note from James McCormack and his team at Fitch, there is good reason to think that the record may be broken this year since 22 ratings for sovereigns are on a “Negative outlook,” meaning there is substantial risk of downgrade.
Most of the problem has come from collapsing oil and commodity prices, according to McCormack. Here’s the Fitch analyst (emphasis added):
“Lower commodity prices continue to be the single most important factor responsible for downward sovereign ratings momentum. Seven of the 10 most commodity-dependent sovereigns rated by Fitch have been downgraded in 2016 or are on Negative Outlook. All are in emerging markets.”
“The partial recovery in commodity prices in 1H16 has led to improved market sentiment towards emerging markets, but not necessarily to improvements in sovereign credit fundamentals. Public and external finances in a number of commodity-exporting countries are not yet aligned with the new structurally-lower price environment.”
Most of the weakness has come from the Middle East and Africa, according to McCormack, with more than half of the downgrades and 10 of the negative outlooks.
Additionally, the UK’s vote to leave the European Union has not only led to a downgrade of its debt, but also the possibility that some of the other countries on the continent could face the same fate.
“Europe’s political backdrop could have negative implications for sovereign ratings, as fiscal consolidation may drop further down the list of policy priorities,” wrote McCormack and his team.
“An easing of fiscal policy in the eurozone has already been evident, prompted by the shift of focus to issues surrounding migration and security, and austerity fatigue. In addition, the fiscal space made available by lower interest rates is not being used to bring fiscal deficits down.”
The US should stay strong, affirmed the Fitch report, but the rest of the world may set an ignominious record.