Scope Ratings, the leading European credit rating agency, has published its sovereign ratings for several major, non-EU economies for the first time: specifically, for the United States, China and Japan, following the release of its revised sovereign rating methodology. This is the latest step in the agency’s expansion of its public finance franchise, which began in 2016 with the acquisition of FERI EuroRating’s portfolio of sovereign ratings.

The following countries’ foreign and local currency issuer ratings were published and the detailed rating reports for each can be found via the links below. Foreign currency ratings were issued for the first time.

• United States: affirmed at AA, Stable Outlook (link to the press release; rating report)
• China: downgrade to A+ from AA-, Stable Outlook (link to the press release; rating report)
• Japan: downgrade to A+ from AA-, Stable Outlook (link to the press release; rating report)

“With this announcement, Scope introduces ratings for the world’s three largest economies, which individually hold systemic importance for the global economy and financial system”, says Dr Giacomo Barisone, Head of Public Finance at Scope Ratings. “The affirmation of the United States at AA reflects Scope’s evaluation of the US’s wealthy, diversified economy, transparent and accountable institutional framework and the dollar’s unparalleled reserve currency status. However, we consider the weakening potential growth outlook, high levels of government debt alongside significant contingent liabilities, and political polarisation to represent meaningful credit challenges.”

Dr Barisone adds that “the downgrade of China reflects weaknesses in the ‘public finance’ and ‘financial stability’ analysis categories under Scope’s sovereign rating methodology. Importantly, the significant and continued increases in non-financial sector debt, large public sector deficits alongside a growing public sector debt stock represent material challenges. Going forward, Scope’s assessment will include a concentration on the extent to which a continued unfavourable debt trajectory is redressed through the initiatives of authorities, including in the period after this month’s National Congress.”

“Scope’s downgrade of Japan is based on a high public debt burden and weak debt dynamics, alongside a weak growth outlook and growth potential that is under trend. But, we consider Japan to retain significant credit strengths with a highly diversified and wealthy economy, exceptional funding flexibility, the government’s commitment to reform, and a strong external position,” Dr Barisone concludes.

Scope’s sovereign ratings assess a sovereign’s ability and willingness to honour debt obligations to private-sector creditors in full and in a timely manner. The methodology implements, among other things, a dual quantitative-qualitative approach, and is underpinned by new research on sovereign and global financial stability risks that emerged after the Great Financial Crisis.