Saturday, January 14, 2012

Nine countries?

Here is a conundrum: if everybody's credit ratings are cut then what do credit ratings signify? Well, we shall soon find out. France, as we know, has had her AAA credit rating cut, as has Austria. This is very bad news for President Sarkozy who has vowed to preserve that cherished AAA and is starting the presidential election campaign by losing it.
The downgrade of France in particularly is evidence of the divergence taking hold between those European countries that still enjoy rock-solid faith on international markets and those whose economic and financial path is more questionable.
As Reuters details:
S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches and the standings of France, Austria, Malta, Slovakia and Slovenia by one notch each.
The move puts highly indebted Italy on the same BBB+ level as Kazakhstan and pushes Portugal into junk status. It put 14 euro zone states on negative outlook for a possible further downgrade, including France, Austria, and still triple-A rated Finland, the Netherlands and Luxembourg.
Germany was the only country to emerge totally unscathed with its triple-A rating and a stable outlook.
This may not be the disaster gleefully predicted by many(a disaster, incidentally, that will affect this country) but it is bad news. However, credit rating is really just that: information that needs to be taken into account when a country tries to borrow money. So one has to ask again: when this many countries are losing their rating, will markets go on paying attention or will they simply metaphorically shrug their shoulders?

Let us not forget that the USA lost its AAA rating last August and the world did not collapse.


  1. Comparison with the US is slightly misleading - as it has its own currency, it's a reserve currency and it has a proper lender of last resort.

    Agree though that largely it will be a psychological blow more than a financial one - the markets have priced in a downgrade for France for sometime now.

  2. As I understand it, especially from reading this,, the ratings agencies are reflecting reality not affecting it.

  3. Quite so. This has been expected for some time though I must admit to being surprised that Austria was AAA. But does it actually matter as so many countries are affected?

  4. Yes, I think it does matter if one considers what the ratings mean. I think that the ratings are absolute not relative. So one could envisage a day when no country in the world had a AAA rating because they all had a question mark over their ability to pay back the loan. However, I do understand what you are suggesting when it comes to how the investors react. If there were a number of countries whose rating was AA and that was the best that anyone could manage, then it would be those countries that one would invest in in the same way as if they were rated AAA. One might expect to get a better return, though. Actually, I think I have reached the limit of my self-taught understanding of international finance.