S&P

[MURUGAVEL]

A country with external debt (14.3 trillion USD) almost as high as its GDP ( about 15 trillion USD), growing at about 2%, and with employee population to total population at about 58%  - USA - has a AA+ rating

A country with external debt of about (8.9 trillion USD) a couple of times higher than its GDP , growing at 0.2% in the last 9 months  - UK , has a AAA rating

A country with external debt of 300 billion - below 20% of total GDP, growing at about 8% - India , has a BBB+ rating ..

That is S&P rating of sovereigns. A 2 trillion USD error in the rating process does not seem to have a change in the final rating ...

• so how is this done ?
• Why is the downgrade done this late - after all it is not that the US economy suddenly became bad overnight?
• What is the impact of rating downgrades on restructure of economies ?
• Should economies that falter ( UK for instance ) look seriously at deficit cuts - just to hold on to this AAA rating ??
• Why are countries so bothered about what is actually an opinion by some company on the quality of their debt (unsolicited in most cases) - particularly if the company does not have such a great reputation ( having rated subprime MBS as AAA , rating a heavily overleveraged Lehman Bros as A till the collapse ... and in a way perpetuating the global economic crisis ) ... ?

--
J.Murugavel
Bharathidasan Institute of Management , Thiruchirapalli 620014

தெளிவி லதனைத் தொடங்கார் இளிவென்னும்
ஏதப்பாடு அஞ்சு பவர் (464)
Those who fear reproach will not commence anything which has not been (thoroughly considered) and made clear to them.

[Ashok Alexander]

Dear Sir,

Please find attached few files which enlighten us with the excellent topic raised by you.

Regards,

Ashok

BIM24

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[Ashok Alexander]

Dear sir,

This file contains S&P methodology & assumptions.

Regards,

Ashok

[SVV]

Dear Murugavel Sir

Imagine a world where US and UK ratings are shifted to BBB+ (= current
India) and India is upgraded to AA+.

That would wreck havoc with the global economy. Simply because a cat
is not supposed to eat as much as an elephant. Countries (economies)
evolve over long periods of time. I am giving below the extract of the
growth of economies over centuries.

GDP (PPP) in millions of 1990 International Dollars
Country Year 1 Year 1000 Yr. 1500 Yr. 1600 Yr. 1700 1820 1870 1913
1950 1973 Yr. 2003
China 26,820 26,550 61,800 96,000 82,800 228,600 189,740 241,431
244,985 739,414 6,187,984
India 33,750 33,750 60,500 74,250 90,750 111,417 134,882 204,242
222,222 494,832 2,267,136
USA 272 520 800 600 527 12,548 98,374 517,383 1,455,916 3,536,622
8,430,762
UK 320 800 2,815 6,007 10,709 36,232 100,180 224,618 347,850 675,941
1,280,625

These data are available in http://en.wikipedia.org/wiki/List_of_regions_by_past_GDP_%28PPP%29
(these data come from an essay/book by the British economist Angus
Maddison Contours of the World Economy, 1–2003 AD)

The data could be jumbled - but what you can see is that the
comparison of the size of economies of India/China and US/UK over the
last 20 centuries. What is most important to realise is that economies
grow because of 'MIGHT IS RIGHT' and 'Ahimsa' and 'Satyagraha' have no
place in economics. They may be good for intellectual fantasies. But
without political power, nothing works. The growth of the western
economies during the Industrial Revolution coincided with them taking
control over Political power. Without Political power, there cannot
be economic power.

If today US is sinking on economic parameters and the world is still
banking on them, it is because of the awe the world has over US's
capabilities. Otherwise, there can be no reason why the US debt
markets hardened (US Treasury interest rates came down and asset
prices increased!) consequent to the downgrading of US. Unheard of and
totally against rational theories of economics.

Therefore, did Obama influence S&P to bring down US ratings, because
he wanted to lower US treasury costs????

Regards

Vijayaragavan SV

[MURUGAVEL]

Dear Sir,

Fully agree. One point I have been harping is that economy ( I also include business ) and polity are interlinked - what is spoken in the public fora is irrelevant. And that is one area that we dont ever touch in B Schools...and yes, the last question is quite possible :)

Regards
Murugavel

Dear Murugavel Sir

Regards

Vijayaragavan SV

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[Sathyamurthy U]

Dear Murugavel Sir and Vijayaraghavan Sir,

My view on your questions/views are as follows-

Was S&P justified is a question that matters to the downgrader as well as to the downgraded.  Indeed the reputation of the rating agency is stained by their rating of the mortgage backed debts.  It was also a humbling moment for the world's largest economy, despite the fact that the U.S has ample taxing power to repay its bonds and the country's central bank has the power to control the world's reserve currency. 

But credit ratings are useful for investors. If it were not for S&P, markets would find or invent some. Rating agencies must do their job, in spite of any political power and speak out.  S&P went ahead with its downgrade even when the U.S. treasury found a USD 2 trillion error in S&P calculations.  It went ahead with the downgrade after correcting the er  rror stating politics as the main rationale.  U.S panel has to come up with a deficit reduction plan before Dec  23,to prevent spending cuts.

It is only a matter of time when China and later India,would become  the largest and second largest economies in the world. Would a rating cut for these economies trigger such a hoopla in world economies?

S&P is not alone, Moody's has a negative outlook on the U.S. and has given the benefit of the doubt to U.S.  S&P's verdict is based on the uselessnessof American politicians.

I wouldnt want to believe that it is because of the awe that the world has over U.S, that the U.S. treasury bond yields fell in the days  after the downgrade as investors bought them for safe haven investing.  It will only be a matter of time when people will get over the conditioning.  China will likely be the knight to save faltering European nations.  India has fixed targets to provide 11 billion dollars of aid over the next five to seven years.  

Political might comes with growing economies.

Dollar being the reserve currency, and other once safe haven investments such as the swiss franc, yen subject to intervention,it  is quite logical that investors would flee to the next safe investment such as gold and US dollar.  So my fallacy would be that this was the reason for U.S yields to decline post downgrade.  No collusion between S&P and Obama is likely.

Please let me know your views.

Regards,

Sathya