Tag Archives: sovereign debt

Badness in Europe

One of the big dark clouds hanging over our economy is our very close ties to Europe. If the European economy tanks, we will be pulled down with it. This is a fact. S&P has downgraded France and just about everyone else in Europe except for Germany.

From WSJ:

France and eight other euro-zone countries suffered ratings downgrades on their sovereign debt Friday, sparking renewed global worries over Europe’s ability to bail itself out of financial crisis.

Standard & Poor’s Ratings Services stripped triple-A ratings from France and Austria and downgraded seven others, including Spain, Italy and Portugal. It retained the triple-A rating on Europe’s No. 1 economy, Germany.

The downgrade to France, the zone’s second-largest economy, will make it harder—and potentially more expensive—for the euro zone’s bailout fund to help troubled states, because the fund’s own triple-A rating depends on those of its constituents. The downgrades also speak to how deeply the concerns over countries on the euro zone’s periphery have penetrated its core.

Oh, and don’t forget Greece. Their debt talks have collapsed.

A couple of things – Thursday

I’m still, frozen (or would focused be a better term?) on the fact that S&P decided that it needed to announce that US debt is getting “too” out of control.

From Brad DeLong:

What is going on here? A sovereign-debt downgrade is supposed to mean that a government’s finances have become shakier: the likelihood of internal price inflation is higher, the future value of the nominal exchange rate is likely to be lower, and the possibility that creditors might not get their money back in the form and at the time they had contracted for had gone up. The value of the dollar should have fallen. The nominal interest rates on U.S. Treasury debt should have risen. The value of equities could have gone either way–macroeconomic chaos would diminish future profits, but stocks have always been and remain a hedge against inflation. That is not what happened here: equities fell, the dollar rose, nominal U.S. Treasury interest rates were unchanged.

There are I think, two things to bear in mind.

First, you can go insane trying to overinterpret short-term market movements.

Second, news comes in flavors: new news, old news, no news, and political news.

If S&P’s announcement were new news being conveyed to the market we would have expected to see the standard pattern that we did not–dollar down, Treasury nominal interest rates up, equities either way. So it is not new news.

If the announcement were old news we would have expected to see no price movements–the smart money would already have taken up their positions, and when those less-informed investors to whom S&P was news responded by selling the smart money was there to buy and offset. That’s not what we saw either: so it is not old news.

If it were no news–if the market as a whole simply thought that S&P was irrelevant–then we would have expected to see no price movements at all. The problem is that we did see price movements: both in equities, and in the dollar. So it is not no news.

That leaves us with political news. (more…)

So, if this is just political theater, who’s behind it? I mean Standard and Poor’s doesn’t have the greatest track record of standing up for the American people. Here is the best thing that I have read about ridiculousness of S&P statement:

They put a “negative” outlook on the U.S. AAA credit rating, citing rising budget deficits and debt.

To which I say “Who Cares?

Its not that I disagree with their assessment — I do not — but I pay it little heed. It was much more important to me as an investor that PIMCO’s Bill Gross was out of Treasuries a month ago (and indeed, is short) than what S&P says. That was all any bond investor needed to know — no ratings agency necessary.

If ever there was an organization more corrupt, incompetent, and less capable of issuing an intelligent analysis on debt than S&P, I am unaware of them. Why do I write this? A huge part of the reason the US is in its awful financial position is due to the fine work of S&P.

Consider what Nobel Laurelate Joseph Stiglitz, economics professor at Columbia University in New York observed:

“I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies.”

Hence, the “negative outlook” of US debt has come about because the inability of Standard & Poor’s to have performed their jobs rating mortgage backed securities. Ultimately, this enabled the entire crisis, financial collapse, enormous budget deficit and now political over the debt ceiling.

Of course there is a negative future outlook. Its in large part the work product of S&P and Moody’s.

Why we even have  Nationally Recognized Statistical Rating Organization (NRSRO) any longer following their payola =driven corruption, their gross incompetency and their inability to discharge their basic duties is beyond my understanding.

So, why didn’t someone investigate S&P and Moody’s for cooking the books? They took garbage and slapped a AAA rating on it and smiled. They also took serious money from all of the major banks who were feeding them these mortgage backed securities. Isn’t that fraud?