Reflecting on US’s Triple-A rating and its downgrade
Last year was very confusing for many bond market followers. Not only someone who merely followed the market, but also big institutions failed to reasonably foresee the changes that followed after series of events.
Probably the inflection point on the market was US’s downgrade. Many of us, who accepted the triple-a rating as default, was surprised by S&P’s sudden downgrade. Yeah, medias were talking about a possible downgrade some time before it took effect, given US’s ever-rising and unprecedented level of public debts, but who thought that one of the “original sin” of the crisis would leave a big scar on its big brother? Highly surprising.
But what remained a puzzle afterwards, at least for some while, was witnessing the rates going down actually. Even the big players, including PIMCO, missed out and shorted US Treasuries. It seemed all pretty logical until EU’s debt problem came to full light. Investors “flew to quality”, and the rates went down to historic levels. Conversely, interbank lending rates between European banks went up to unforeseen levels, and banks and corporations were and are still having hard time to fund in dollar terms. Fed, which seems to act as if it’s the last resort of the world, is now actually monetarily easing the European markets with its dollars by initiating the highly controversial currency swaps.
You can see how the market dynamics is getting much harder to assess; when assessing Europe’s situation, you may now have to listen to what Ben says.
Returning to the rates issue, even though the US is in a precarious situation, I think it is essentially the external factor hindering it from derailing.
So, is it then when the Europe finally stabilizes that we have to worry about the rates going up? What will happen when two other remaining credit rating agencies all together downgrade the US? Will it be ok and just move on, and just concentrate what happens across the Atlantic?
Rating agencies will not downgrade the US any further. S&P pissed off the gov't and are now paying for it heavily behind the scenes. Moody's is significantly owned by Warren Buffett who supports Obama, nothing will happen. Fitch never leads a rating, nothing will happen due to S&P and Moody's inaction. The sovereign business is slowly dissipating.
http://aswathdamodaran.blogspot.com/2011/08/chill-dude-it-is-not-rating…
I disagree with his idea.
For equity investors investing in a company, it might leave the investors worse off by employing too little debt, or to put it differently, by not reaching the optimal debt-to-equity ratio. But for a country, I don’t think the same theory applies.
For developed countries, it’s important to keep your house in order to auction off bonds in the primary market. And as the bond world is dominated by large institutional investors, until a credible alternative becomes available, it will be the credit rating that will primarily matter for those players ; anybody who works in the bond industry knows the critical role a rating plays before making an investment.
And the truth is, a countries’ indebtedness plays a large role when agencies assign a rating to a country. Simply put, losing a notch might mean an upwards of several to meaningful amount of basis points, and as issuing sovereign bonds is one of the primary sources for a government (and frankly, it now appears as the main source for stabilizing a countries’ banking industry), it doesn’t seem to be a smart play for one to risk its own rating. And, there are more constructive ways to promote growth instead of fueling the economy with huge debt loads.
Praesentium autem voluptates velit adipisci necessitatibus reiciendis. Et qui qui consequuntur. Est sit deserunt blanditiis enim et nihil quo molestiae. Autem nulla et quasi error architecto magni.
Voluptatem in error voluptas. Inventore quos mollitia qui repellat modi distinctio dicta. Et qui corporis sunt animi.
Saepe sequi ipsum omnis qui qui. Doloremque nihil mollitia neque exercitationem consectetur. Odio dolore velit sit sit sed mollitia.
Dolore dolore nihil sit accusamus perferendis. Iure aperiam unde illo placeat. Molestias sapiente corrupti perspiciatis voluptatem sed et fugiat quidem. Voluptatum accusamus molestias quo perferendis. Molestiae sapiente soluta placeat ea quidem. Corrupti eveniet sint sapiente expedita.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...