Since the onset of the credit crisis several events have highlighted just how little a rating reflects market reality. Brazil’s and Mexico’s credit default swap spreads are a case in point. Since January, Mexico’s five-year CDS have been trading wider than Brazil’s, even though Mexico is rated BBB+ by Standard & Poor’s, two notches higher than Brazil’s BBB–.
In normal times, Mexico’s fundamentals stand out from Brazil’s. Mexico has a higher GDP per capita ($14,200 compared with $10,100), a more open economy (55% compared with 24% exports plus imports as a proportion of GDP) and lower public-sector indebtedness. Mexico has...
