Two sovereigns carrying the same letter rating now fund at spreads that differ by more than eighty basis points. Either the ratings mean less than they did, or the market is pricing something the agencies do not model.
It is the second one. The agencies model the capacity to pay. The market is increasingly pricing the willingness to prioritise paying, which is a political variable and does not fit in a spreadsheet.
Debt-to-GDP explains less of the cross-sectional variance than it did a decade ago. Interest-to-revenue explains considerably more, and it is the ratio that actually binds a finance ministry in any given year.
Solvency is arithmetic. Willingness is politics. Only one of them is rated.
The practical consequence for allocators is that the sovereign bucket has to be underwritten name by name, the way credit always was and the way rates never had to be.
