For those readers who are unfamilar with the children's book, it involves the famous cat (read "bank") living the high life by eating cake in the bath tub. When discovered by the hard working children (read "US taxpayer), they banish him from the house only to discover that for his sins the cat left a pink cat stain in the tub. No problem, shrieks the cat as he removes the pink ring with mother's white dress (if the "dress" is the US government's balance sheet, I would struggle to call it white, soiled might be more appropriate). As the story progresses, the blemish is subsequently transferred from the dress to the wall, from the wall to dad's shoes and so on and so forth.

The point is that the transfer of risk from the so called toxic assets from the bank's to the government's balance sheet through the various support programmes doesn't actually remove the risk but simply redefines its ownership. Finally the treasury markets are waking up to the fact that the what used to be the flight to safety play might actually be the toxic asset trade.

What are the sovereign rating agencies doing in terms of alerting us to the possible risks? For a few selective countries such as Spain, the UK and Ireland the downgrades are already underway. However, both the major rating agencies (Moody's and Standard & Poor's) have reaffirmed the US' triple-A rating. If the Greenback continues to weaken against other currencies, it raises, what is for now an acadamic question,could the US have different foreign and local currency sovereign ratings, or in other words, would their opinion differ on the ability of the US to service foreign debt obligations as compared with their ability to print money?

Just like the children's book, the only way to remove this blemish will be under the hat of Little Cat Z (as the Chinese Finance Minister's name (Xie) is pronounced).How will he do? My money is on some type of Brady Bonds swap for US Treasuries.

Disclosure: no positions.