The First Cut is the Deepest

The US's loss of Triple-A and Past Comparisons

In S&P's classroom, the perrenial triple-A students who've never suffered a report indicating a downgrade (in domestic currency OR foreign currency, long-term) were: Austria, France, Germany, Luxembourg, Netherlands, Norway, Switzerland and the UK. And of course, until last friday, the USA. Some commentators and pundits have taken the role of overbearing parents openly lamenting the fiscal future while others remain sanguine of our chubby pupil’s long term prospects (reserve currency status, military might, high GDP and high innovation rate) and critical of the professor’s allegedly meaningless grading criteria.

With this recent news the top three economies in the world by GDP (USA, China and Japan) are all AAA-rating-less. (Note that I don’t count the Eurozone as a coherent economy). Putting it that way, losing a mark may not seem like a big deal. Neverthless, the question on many people’s minds is “How can the US regain a triple-A?”. To that end, an AFP piece exploring that question, has made its rounds in the last few days, being re-printed in newspapers ad nausem. Before analyzing past sovereign rating redemptions, its important to distinguish between sovereign credit ratings in domestic currencies and those in foreign currencies- if not equal, the later is usually lower- indicating a government’s lower priority on repaying debts denominated in other’s currencies. The AFP piece gives the examples of Australia and Canada of countries who regained AAA status, but those ratings both only applied to debt in foreign currency- their domestic currency ratings never left triple-A.

Another country not mentioned in the AFP piece with a similar story is Sweden, which regained a triple-A rating on foreign currency debt it lost in the early 90s. Though a single and temporary downgrade from triple-A on foreign currency did not seem to have large effects in any of the three economies, its important to note that if the USA regains a triple-A rating on domestic currency it would be the first country to ever do so. Furthermore, its widely understood that one cut leads to another- giving new meaning to the Cat Steven’s 1967 hit “The First Cut is the Deepest.” To that end, the overbearing parents may not be so premature after all.

Downgrade Plotted on Sweden’s main stock market index (OMX) and 10y Gov Yields:

Though any kind of statistical tests are probably inappropriate due to the conflux of variables, a preliminary look doesn’t suggest that Sweden’s temporary loss of AAA  produced any persistent damaging effects.



Data: Standard & Poors, Sovereign Ratings History since 1975 [PDF], 3/07; Sweden Stock Market & 10Y: TradingEconomics.com

Comments

[Nik]

Liked the post.

http://forums.bharat-rakshak.com/viewtopic.php?f=2&t=5751&start=1640