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Contagion from emerging markets
According to a recent Fitch Ratings/Fixed Income Forum investor survey, institutional investors see contagion from the emerging markets as the top risk to the U.S. credit markets over the next year, and the securities of corporations in those markets were the least-favored asset class among respondents.
So what have the Big Three rating agencies done? Their assessments are supposed to be valid for the long term, and to withstand likely future business cycles. But as was the case with their evaluations of mortgage-related securities, financial institutions and sovereigns in the United States and Europe in the run-up to 2008, one wonders whether even what has already transpired was duly weighed four or eight years ago, when so many rating upgrades were decided.
Likewise, the agencies appear to be shutting their eyes to what the financial markets have been signaling–and for several years now–in the hope that investors will reverse themselves once the Federal Reserve actually implements its first rate hike. The impression is that the Big Three are betting that once the “big bad wolf” stops growling and claims its first victim, the world will be a safer place.
Exhibit A: Peru
The question can be elucidated further by focusing on a concrete case, and our Exhibit A involves the agencies’ assessment of Peru’s creditworthiness. The Big Three promoted Peru to investment-grade in 2008-09, and they subsequently upgraded it further to “A3” (Moody’s) and “BBB+” (Fitch and Standard & Poor’s), with similar or even higher ratings for the government’s domestic debt.
None of these high Peru ratings have been slimmed down in recent years despite the fact that the country, a quintessential commodity exporter, has come under pressure as of late and the rating agencies’ economic projections have repeatedly proven overoptimistic.It bothers us, however, that none of the Big Three have made it plain to current investors that the government of Peru has long been in default on old bondsnow owned by a mix of domestic and foreign investors. These are bonds which were originally issued when the country was ruled by a leftist military government in the 1970s, and one-third of total agricultural acreage was seized for the benefit of peasants, with bonds given to landowners in partial compensation for their losses.
And yet, the bonds are legal obligations which the highest courts in Peru have ordered the government to revalue (to adjust for past inflation and currency devaluation) and to start servicing. Doing so would not put much of a burden on the country’s public finances, but the troubling aspect is the unwillingness to pay that successive governments in Peru have demonstrated. 

This is no minor matter when it comes to the proper credit evaluation of a sovereign.
In recent months, two small but independent rating agencies, HR Ratings and Egan-Jones, have done their own assessments of Peru, and both properly assigned a “D” rating to the defaulted land-reform bonds while the latter, after taking into consideration this default and other weaknesses in the underlying credit story, also rated Peru a mere “BB” credit.
Might the case of Peru be the proverbial canary in the Big Three rating agencies’ mine?