The big news from yesterday, Friday, January 13, 2012 is the reduction of the credit rating of 9 Eurozone members, among which France and Austria, which lost their AAA rating. The dynamics of interest rates on government bonds, the several not so successful  auctions and the rising price of credit default swaps (CDS) revealed that the downgrade is to a large extent expected by the market participants and has probably already been incorporated in the cost of debt of the troubled European states.

The downgrade, however, will influence the financial stability in the corresponding countries, because of the pivotal role of credit ratings in financial sector regulation, particularly in determining the quality requirements for collateral. Apart from that, several empirical studies have outlined that a credit rating downgrade leads to sustainable increase of borrowing costs in the long term.

History shows that an incremental change in the credit rating is not symmetrical. The rating reduction usually takes shorter time, as a downgrade by 2 (or more than 2) notches at once (which is the case of 13 January for Italy, Spain, Portugal and Cyprus) is not uncommon. The rating upgrade is, however, a slower process, requiring a sustainable improvement of the main indicators for financial stability in a country. An increase of the credit rating of a sovereign by more than one notch at once is rarely seen.

The latest downgrade of credit ratings in Europe is largely symbolic, because it clearly admits that there is a fiscal crisis not only in the so called peripheral economies, dubbed PIIGS (Portugal, Ireland, Italy, Greece and Spain), but also in the core of the Eurozone (including France and Austria). In the Euro area, only Germany, the biggest European economy, has so far kept its rating and maintained a stable outlook.

The downgrade of several Eurozone members is in itself not a good news for Bulgaria, as long as some 50% of Bulgarian exports are produced for the Euro area, which is also the source of 70% of the inward foreign direct investment. The credit rating decrease additionally undermines the confidence in the stability of the Euro, to which the Bulgarian currency is pegged as part of the currency board arrangement.

On the upside, the new downgrade of other European governments improves the credit rating of Bulgaria in comparative perspective. The rating of Italy and Ireland is currently only one notch above the rating of Bulgaria – something almost unthinkable before the outbreak of the European debt crisis. Apart from Ireland and Italy, among the losing countries are Romania and Hungary, which could not cope with the crisis and lost their investment grade rating. Namely Romania, Hungary and the other Central and Eastern European countries are among Bulgaria's main competitors for attracting foreign investment.

Bulgaria has the same rating as Brazil and Russia and a rating one notch higher than India's – the countries which, together with China, are collectively known as BRICs, and are widely considered to be the future engine of the world economy.

The chart clearly shows that there is a discrepancy between the sovereign credit rating and the market assessment of risk in the corresponding country. Somewhat paradoxical is that some countries, which have lower credit rating also have lower borrowing costs on the international markets. In December 2011, for example, Bulgaria with BBB rating had lower interest rates on long-term (10-year) government bonds than all countries, which have been assigned the same rating, and even than some countries with higher rating such as Ireland, South Africa and Italy, rated at BBB+.

The keeping (or the increase) of the credit rating of Bulgaria, as well as the maintenance of low long-term interest rates on government debt, which are a consequence of the relatively conservative fiscal policy here, would further reduce the cost of financing for the private sector and would eventually exert positive impact on the inflow of foreign capital in the country in 2012 and the years ahead.

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