The Moody's USA Downgrade

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?

Moody's now admits two things: firstly that triple-A doesn't mean risk-free (thanks, guys, I think we'd worked that out by now), and secondly -- more interestingly -- that the US is not the safest triple-A credit.

There are now three levels of triple-A, when it comes to sovereign bonds. The weakest -- which have been classed as "vulnerable" to a downgrade -- are Spain and Ireland. The strongest -- which have been classed as "resistant" to a downgrade -- are Germany, France, Switzerland, Austria, Australia, Canada, Denmark, Finland, Luxembourg, Netherlands, Norway, Sweden, Singapore, and New Zealand. And in the middle -- stronger than the "vulnerable" countries but weaker than the "resistant" countries -- are the two "resilient" countries: the UK and the US.

Which means that Moody's now considers the USA to be a weaker credit than Finland or Singapore: a handy datapoint for anybody who thinks the US empire is crumbling.

(HT: Alea)

Comments

[mr freddo]

It will be a long time before anything that Moody's reports is taken with authority.

2009 Feb 13 02:56 AM

[Truefire]

Who was that from at Moodys? Deaf, dumb or blind.

2009 Feb 13 07:44 AM

[Larrysyr]

While there may be something in this story, I doubt it.

I added up the GDP for all 14 of the "strongest" countries listed, and the total is about $13.4 trillion, while the US GDP is over $14 trillion. The info came from the CIA Factbook page:

www.cia.gov/library/pu...

The USA operates in a league of its own, so such comparisons are meaningless. Government bonds will be paid, the question is whether inflation will obliterate the value of those payments. If that happens, the "strongest" countries will also face significant pressures given the dollar's role as reserve currency.

Moodys didn't know what they were evaluating when they rated MBSs AAA, and this comparison is meaningless.

2009 Feb 13 10:10 AM

[HChang]

S'pore government also invested in UBS, Barclays, Citigroup and Merryl (now BOA) the last 3 years and lost big time based on current stock prices. But it's still safer than USA.

2009 Feb 13 11:07 AM

[JohnL]

One of the great oxymorons of our age is "risk-free investment." To invest is to put capital at risk. Even keeping cash in a safe entails currency risk, inflation risk and the risk of theft. Using that phrase in the same sentence with "U.S. treasury bond" is adding insult to injury.

2009 Feb 13 11:30 AM

[Rob Viglione]

This rating is merely a precursor to what bond and gold markets are starting to tell us: America's governments are, and have been, mismanaged for far too long.

Citing America's size, alone, is irrelevant when it comes to meeting debt service obligations. Even giants fall...

2009 Feb 13 01:30 PM

[henarl]

Maybe we should let Moody's value the junk on bank balance sheets instead of using mark to market, since they did such a great job rating that stuff AAA in the first place. That should solve the liquidity problem for the financial companies. After all, everyone seemed to believe those ratings before. Why does anyone still pay ANY attention to what Moody's says anymore? Why are they even still in business?

2009 Feb 13 03:17 PM

[omooc]

I read, a while ago, that there is a credit-insurance market against the USD.

2009 Feb 13 08:04 PM

[Aviva]

Thank you for intresting information. How does isreal rank?

2009 Feb 14 02:35 PM