Across the Curve details:
S and P has maintained it AAA rating on 19th century superpower, the United Kingdom, but has revised its outlook to negative. S and P cited the country’s increasing debt burden for the move.Here's a chart (from a recycled post) showing the way Moody's thinks about sovereign risk.
Looks like we can update the United Kingdom as a vulnerable country.
I understand Moody's ratings don't necessarily apply directly to equity, BUT this does tell the story rather well...
Click for Larger Chart
And now... a full year too late The Bond Tangent details:
According to Marketwatch, Moody's cut Ambac to Ba3 from Baa1. Ambac senior debt was cut to Caa1 (highly speculative). Moody's cites significantly increased loss estimates, especially on Alt-A transactions.One question at this point... why bother at this point?
Reuters reports:
Ahead of a major bond sale next week by California, Fitch Ratings on Thursday cut its "A+" rating on $47.4 billion of state general obligation debt to "A" with a stable outlook, citing falling revenues and the weak economy in the most populous U.S. state.
Fitch analysts in a report noted California's "economic performance and revenue expectations have continued to decline since the state developed its current revenue forecast in November 2008," and pointed to a state unemployment rate of 10.1 percent and a recent state legislative analyst's warning of a "sizable" revenue shortfall in the next fiscal year.
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.Click for Larger Table
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.
“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.
In my post regarding the shift in the composition of the Barclays Capital Investment Grade Index, I was asked:
Any idea why most recent data points show Aaa at higher yields than Aa??In fact, I do... the Aaa (FYI- Barclays Capital refers to this ratings 'tranche' as Aaa, not AAA) is made up predominantly by GE Capital (predominantly is an understatement).
The best quality borrowers, reliable and stable (many of them governments)So why are spreads so wide? According to Morgan Stanley (in reference to GE):
“Investors do not want to own a stock with dividend cut risk. Investors do not want to own a stock with rating agency risk. Investors do not want to own a stock where substantial earnings tailwinds come from past tax reversals. And lastly, investors do not want to own a stock with a financial sub, particularly one which is substantially under-reserved.”This doesn't sound like a "best quality" "reliable" "stable" or "government-like" entity. Surely the ratings agencies must think differently. Lets get the opinion of S&P analyst Robert Schulz:
The quarterly results show that 2009 may be more difficult than expected for GE Capital. The financial arm makes loans for everything from consumer credit cards to big commercial energy projects.How difficult? According to Schulz:
Credit losses are now expected to be $10 billion, $1 billion more than GE forecast in December. Losses in the company's real estate portfolio are also expected to reach $4 billion, compared with a $2 billion gain.So, in the worst financial crisis since the Great Depression, S&P's own analyst declared that after GE needed a $139 billion in FDIC backed debt just two months ago, was put on negative outlook in December, and has its hands in everything from consumer credit cards to big commercial energy projects (again, in the worst financial crisis since the Great Depression) they still deserve a triple A rating.
John A. Yarmuth, a Democrat from Kentucky, chose to read aloud from an instant-message conversation between two S&P employees in the firm’s structured product division.
“The other writes back: “The model does not reflect even half of the risk.’”“The first employee writes back: “Yeah, but we rate every deal. It could be structured by cows, and we would be rating it.’
