Thursday, February 12, 2009

Moody's: The United States is Resilient... Not Resistant to Downturn

Felix at Portfolio.com asks the worrisome question:

Can the yield on US Treasuries be considered the "risk free rate of return" if there are other securities which are lower-risk than US Treasuries?
Apparently Moody's has broken up their AAA rating into three tiers and the United States is not in the top tier (though I am left wondering who trusts / listens to / respects / cares about Moody's these days). Reuters reports:
The "Resistant" category included Germany, France, Canada and the four Scandinavian countries, whose ratings have so far been untested. These countries have either entered the financial crisis from a very strong position or have economic models that remain robust, it said.

The "Resilient" group comprises the United States and the UK, whose ratings are being tested due to a shock to their growth model and large contingent liabilities. But it added: "These countries display an adequate reaction capacity to rise to the challenge."

The size of the U.S. and UK economies, financial markets and capital flows and relative debt levels to growth mean policymakers have more scope to loosen fiscal policy without endangering the public finances too much.

Ireland and Spain fell into the third, "Vulnerable" group, which refers to nations which are forced to take risks with their public finances.
Click for Larger Table



Anyone ready for a conspiracy theory? Drumroll please.... this announcement by Moody's comes on the same day as Dr. Greenspan's panning of rating agencies. The Big Picture quotes Dr. Greenspan as saying:
“What we have created in this world is an aura around the credit rating agencies about certification from them is the Good Housekeeping seal of approval, ” Mr. Greenspan said. “I will tell you the record of a lot of the forecasters of ratings have not been distinguished. They never were.”
Was this whole announcement just meant to deflect away Dr. Greenspan's criticism? I doubt it, but I bet more discussion centers around the Moody's rating decision than Dr. Greenspan's quote in the A.M.

13 comments:

Tom Lindmark said...

Pretty weird when they rank countries that can't even print their own money ahead of an economy with a $13 trillion GDP, isn't it?

Jake said...

indeed

Don said...

What was the criteria used? What exactly are they rating?

Don the libertarian Democrat

Kosta said...

Oh Canada, wherefore art thou?

Canada was in the report, I would have loved to have seen it in your matrix.

Anonymous said...

Here's a source for a nice graph on canada: http://www.fin.gc.ca/ec2008/Ec/eca1-eng.html

Alex said...

Good point about the currency issues. I would like to see an expanded matrix showing, say, the 20 largest world economies. Heck, let's start with all countries in the world (given that we would have some min GDP) and work our way down from there.

Richard said...

Canada? Are we to be included as (North) America?

ajw said...

As long as we're conspiracy theorizing, couldn't the causality work the other way? IOW, Greenspan is trotted out to deflect attention away from the implications of this chart, which sure looks like a step in the process of inching toward admitting that the US really is vulnerable to a downgrade.

Jake said...

ajw- i like your thought process (i wish i thought of that!)

Demarketeer said...

I forget if it's Moody's or S&P, but Canada for some reason beyond comprehension is not universally AAA rated, despite many years of budget surpluses, a financial system that needed no bailout and a modest projected deficit for 2009 and 2010.

dearieme said...

Australia isn't there either, I see.

Jake said...

Updated with Canada and Australia...

Anonymous said...

Do we have a $13 trillion dollar economy? Says who exactly?

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