Union Investment questions Moody’s ratings move on EU

Union Investment has questioned the recent warning by Moody’s Investor Service it might cut the European Union’s top-notch credit rating. The German manager argued the US has inferior fundamentals, but a more secure rating from the agency.

The German asset manager has underlined the importance of having its own inhouse ratings, arguing agencies “continue to act pro-cyclically and react belatedly to developments” despite criticism levelled at them.

Moody’s Investors Service cut the outlook on the EU’s AAA rating to ‘negative’ on Monday, cautioning of a rating fall if the Eurozone’s debt crisis escalates.

It cited worries about the finances of Germany, France, the UK and the Netherlands, which together supply nearly half of EU budget revenues, and contribute significantly to the various Eurozone rescue packages.

Frank Engels, head of fixed income portfolio management at Union Investment, said: “We are not surprised by Moody’s announcement as the current crisis is putting all European Union members under pressure.

“However, it is not clear why Europe – whose fiscal data is significantly better overall than that of the United States or the United Kingdom and in fact has small current-account surpluses – is rated lower than the Anglo-Saxon countries.”

He said investors could only rely on independent agencies’ assessments “to a limited extent”.

“Statutory and regulatory requirements mean that asset management companies are still dependent on the established rating agencies. But their ratings are no longer at all adequate for forward-looking investors.”

Union has an internal country rating system, which has anticipated long-term trends behind almost 80% of recent ratings changes by the main trio of agencies.

Its UniInstitutional Global Government Bonds fund will use the country rating for its basic allocation, and invest in investment-grade global government bonds, from November.

Union’s system accounts for macroeconomic fundamentals, assessing countries’ ability to repay their debt, as well as foreign trade deficit, the level of debt and economic growth; a country’s willingness to pay, including implementation of any reforms required in a crisis; and an early-warning system designed to detect possible weaknesses, “even in countries that are essentially in a strong position”.

Engels said: “Alongside duration management, country allocation is now the most important performance driver in the fixed income sector.”

Overall, Union’s system rates industrialized countries lower than agencies do, due to these nations’ poor growth, high debt and lack of budgetary discipline. Emerging markets, with the opposite traits, rate higher at Union.

Its ratings for five of six major economies differ from the average rating of the triumvirate of agencies. These are Ireland (A from Union versus BBB); the US (BBB+ from Union versus an AAA average from agencies); Portugal (BB+ by Union versus BB); Italy (Union’s BB versus BBB+); and Greece (D by Union versus CC from agencies). On Spain the groups agree, on BBB.


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