Getbig.com: American Bodybuilding, Fitness and Figure
Getbig Main Boards => Gossip & Opinions => Topic started by: jedibrat on August 12, 2011, 04:05:11 AM
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Cliff notes:
-Why the hell are a financial rating agency making decisions based on an analysis of politics?
-Ratings Agencies are still in the doghouse after failing to spot the cause of the financial crash in the first place.
-Immediately after the downgrade, investment in treasury bonds actually increased which suggests the rating is irrelevant to investors.
Substandard & Poor
The messenger may be flawed, but the United States should take heed of the message
Aug 13th 2011 | from the print edition
IT WAS a humbling moment for America, and the decision by Standard & Poor’s to strip the country of its triple-A credit rating on August 5th came at a particularly sensitive time. Furious Obama administration officials immediately attacked the ratings agency—and the criticisms increased on August 8th, the first trading day following S&P’s announcement, when the Dow Jones Industrial Average plummeted by 5.5%.
Was S&P justified? This matters for the downgrader as well as the downgraded. The reputations of the ratings agencies are still stained by their gross overstating of the quality of mortgage-backed bonds before the credit crisis (see article).
The most extreme criticism is that S&P and its peers should not really be in the business of rating the American government anyway. A credit rating is far less relevant to Treasury bonds than it is to, say, a corporate bond. The United States government has ample taxing power to repay its bonds, and its central bank, like that of any country that controls its own currency, can as a last resort simply print the money needed, albeit at the risk of inflation. As if to underline the point, yields on US Treasury bonds actually fell in the days after the downgrade, as investors fled to them as a haven.
All true, but the basic fact is that credit ratings are useful for investors: if the likes of S&P did not exist, the market would invent them. No matter how much Barack Obama huffs and puffs, a ratings agency’s job is to rate bonds, including government ones, and to speak out when it thinks the least risky asset in the world has become riskier. So did S&P get it right?
The gravity of its announcement was not helped by some dodgy analysis. Before releasing its report, S&P notified the Treasury Department, which soon discovered that the firm had overstated cumulative deficits by some $2 trillion, inflating the debt by 8% of GDP in 2021. S&P corrected the error but went ahead with the downgrade, revamping the announcement to elevate politics as a main rationale for the move. Critics say the timing was odd too. Under the deal between Mr Obama and Congress to raise America’s debt ceiling, a panel has to come up with deficit-reduction plans which Congress must accept or reject by December 23rd; if the panel fails to agree or Congress rejects its proposal, automatic spending cuts are triggered in 2013. Moody’s and Fitch, the two main rival agencies, have for now given America the benefit of the doubt.
AAAaaargh
Yet as flawed a messenger as S&P is, its message should still be heeded. Even after cleaning up its maths, it concluded that America’s debt was rising unsustainably as a share of GDP, in contrast to other AAA-rated countries such as Britain and Germany that have put in place plans to stabilise that ratio. (A similar rationale explains why Moody’s has a negative outlook on America’s rating.) As for the timing, the debt deal in Congress just before the downgrade was plainly inadequate. It focuses its cuts on discretionary spending, which future legislatures can too easily override. More durable deficit reduction means reforming both the tax system and entitlements such as pensions and health care for the elderly. And there is no guarantee that Congress will allow the deal’s spending cuts to occur.
Above all, S&P’s verdict is based on the uselessness of America’s politicians: both their inability to deal with the budget and their vividly displayed political brinkmanship. S&P argues that America’s policymaking has become less predictable and its finances less manageable. The threat of default, previously unthinkable, is now a bargaining chip in Washington. This is not how an AAA-rated country behaves. S&P did America a favour by pointing this out.
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LOL
1. American raters do what the hell US government tells them to do. Upgrade or downgrade.
2. What matters are independent raters of creditor nations; China has downgraded USA long time ago
3. Investments increased in treasuries? Yeah, US government told investors to buy them. Funds buyers back in all quiet.
That's for that. Hope this helps.
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LOL
1. American raters do what the hell US government tells them to do. Upgrade or downgrade.
2. What matters are independent raters of creditor nations; China has downgraded USA long time ago
3. Investments increased in treasuries? Yeah, US government told investors to buy them. Funds buyers back in all quiet.
That's for that. Hope this helps.
Major financial institutions are a little more independent than you think. In fact, all too often politicians are at the mercy of the markets.