The next stage of the credit crisis is approaching. The first stage of the credit crisis was characterized by subprime borrowers defaulting on their mortgages. These borrowers were the weakest link in the lengthy chain of credit. Following the subprime fiasco, stronger links in the chain, including credit-worthy consumers and corporations, had difficulty obtaining credit. The inability to access credit led to bankruptcy, bailout and/or nationalization of many financial firms by governments around the world. At the time, even though governments were compromising their own balance sheets by bailing out insolvent companies, government bonds were seen as a safe haven and were hoarded by investors. The strength seen in government bond prices during the credit freeze was instrumental in enabling governments to actively bail-out borrowers and initiate economic stimulus programs.

Government intervention resulted in a tremendous rebound in financial markets in 2009, and today, markets and investors appear to believe that the worst of the financial crisis is over. However, with governments borrowing more money than they can repay, the financial crisis has only just begun. In the summer of 2007, many investors overlooked the deteriorating credit quality of subprime mortgages and the collapse of the Bear Stearns' subprime funds, as demonstrated by stocks hitting new highs in October, 2007. In similar fashion, stocks are continuing to hit new highs as many governments' credit ratings are downgraded and/or put on negative watch by the rating agencies.

The deteriorating credit worthiness of governments around the globe has now become pervasive as can be seen in the list we have compiled of excerpts from news articles on the topic. While this list is not comprehensive, the large number of countries included overwhelmingly supports our belief that we are on the cusp of the next stage of the ongoing credit crisis.

Portugal - Financial Times - January 10, 2010

"If Portugal wants to avoid a downgrade, it is going to have to take meaningful, credible steps to get the deficit under control," said Anthony Thomas, a senior sovereign risk analyst with Moody's credit rating agency. Moody's and Fitch both placed Portugal's sovereign debt rating on a negative outlook in the autumn, a measure that implies a probable downgrade within 12 to 18 months.

Iceland - The Telegraph - January 6, 2010

Standard & Poor's, the credit rating agency, has put Icelandic debt under negative credit watch, a day after Iceland's president blocked a bill of compensation for the failure of Icesave bank. The agency said that "as a result, we could lower our ratings on Iceland by one to two notches within a month". The decision by S&P came after the Fitch credit rating agency had downgraded Iceland's long-term debt rating from BBB- to BB+ late on Tuesday, citing a "renewed wave of domestic political, economic and financial uncertainty." It (S&P) said: "The Creditwatch placement indicates the likelihood of a downgrade if political uncertainty grows and external liquidity pressures persist in the wake of President Olafur Ragnar Grimsson's veto of the 'Icesave Act'."

France and United Kingdom - Telegraph - December 22, 2009

Fitch Ratings has given its bluntest warning to date that Britain and France risk losing their AAA status unless they map out a clear path to budget discipline over the next year.

Mexico - Reuters - December 14, 2009

Standard & Poor's trimmed Mexico's credit rating one notch to BBB from BBB-plus, citing fiscal challenges it expects will persist "over the coming years," but at the same time lifted them to a stable from negative credit outlook. The move by S&P was widely expected and comes after Fitch cut the country's credit rating one notch to BBB and gave a stable outlook on Mexico three weeks ago. This was Mexico's first downgrade in over 10 years.

Dubai - Reuters - December 10, 2009

Moody's said that the rating downgrades reflect the weakening in Dubai's economy and the repercussions on the banks' asset quality and earning power. Exposure concentrations to the construction and property sector, as well as Dubai government-related entities, are significant and could entail material losses. The direct exposures to Dubai World are manageable given high capitalization levels. However, the rating agency notes that the negative investment sentiment that has been sparked by the restructuring could have longer-lasting effects on Dubai's economy and could constrain the banks' ability to access debt capital markets in a cost-effective manner for longer than was previously expected.

Spain - BBC News - December 9, 2009

Spain has had its credit outlook cut to negative from stable by the ratings agency Standard & Poor's. The agency said Spain faced a deeper deterioration in public finances and a longer period of economic weakness than it had previously expected. "Reducing Spain's sizable fiscal and economic imbalances requires strong policy actions, which have not yet materialised," Standard & Poor's said in a statement.

Greece - Wall Street Journal Online - December 8, 2009

Ratings agency Fitch downgraded Greece on Tuesday to BBB+, outlook negative. Fitch said its move was due to "concerns over the medium-term outlook for public finances given the weak credibility of fiscal institutions and the policy framework in Greece."

United Kingdom and United States - Bloomberg - December 8, 2009

Moody's Investors Service said the top debt ratings on the U.S. and the U.K. may "test the Aaa boundaries" because public finances are worsening in the wake of the global financial crisis.

"The deterioration has been pretty severe," said Pierre Cailleteau, managing director of sovereign risk at Moody's, in a Bloomberg Television interview in London. "We expect a pretty strong policy response in the next couple of years in order to keep the debt in the Aaa range. We expect them to bend but not to break."

The U.S. and U.K. have "resilient" Aaa ratings, as opposed to the "resistant" top ratings of Canada, Germany and France, Moody's analysts led by Cailleteau said in a report today. None of the top-rated countries is "vulnerable," or have public finances that are "stretched beyond the point of 'no return' to the Aaa category," New York-based Moody's said.

Vietnam - Wall Street Journal Online - November 26, 2009

Vietnam devalued its currency, the dong, by roughly 5% against the U.S. dollar, while also increasing interest rates in a bid to damp rising inflation. The country's central bank raised its benchmark interest rate by one percentage point to 8%, effective Dec. 1.Wednesday's devaluation -- Vietnam's third since June 2008 -- reflects strains on the economy caused in part by aggressive stimulus spending and low foreign reserves. It also highlights differences between Vietnam and its regional neighbors. Vietnam is one of the only economies in Asia with both a fiscal budget deficit and a current-account deficit, a combination that puts pressure on the dong to weaken.

Japan - Reuters - May 18, 2009

Moody's Investors Service stripped the Japanese government of its last triple-A foreign currency credit rating on Monday in a move that could revive market speculation about the creditworthiness of other rich nations, especially the United States. The two-notch downgrade to Aa2 from Aaa was a token censure for Japan which has almost no foreign currency debt exposure. Moody's upgraded Tokyo's local currency rating to Aa2 from Aa3 saying the domestic bond market was able to cope with government plans for new borrowing. The agency described the move as a largely technical one but also said Japan was in a worse situation than many other governments in its top ratings bracket.

Ukraine - Bloomberg - February 25, 2009

Ukraine's credit rating was cut two levels by Standard & Poor's to the lowest in Europe, a day after Latvia was downgraded to junk, as eastern Europe's most debt- laden economies lurch closer to default. Ukraine's long-term foreign currency rating was lowered to CCC+, seven levels below investment grade, the rating company said in an e-mailed statement today, saying political turmoil poses growing risks to the country's International Monetary Fund loan. The rating is on a par with Pakistan and S&P left the outlook negative, indicating a possible further cut.

United States - Reuters - September 17, 2008

Pressure is building on the pristine "AAA" rating of the United States after a federal bailout of American International Group Inc, the chairman of Standard & Poor's sovereign ratings committee said on Wednesday.

The $85 billion bailout of AIG on Tuesday by the U.S. Federal Reserve "has weakened the fiscal profile of the United States," S&P's John Chambers told Reuters in an interview.

"Lack of a pro-active stance could have resulted in further financial stress and put pressure on the U.S. triple-A rating," Chambers said. "There's no God-given gift of a 'AAA' rating, and the U.S. has to earn it like everyone else."