Sure , a country can print currency at will , a corp better be as pure as Caesar’s wife
Lots of banks and corporations hold treasuries so a default by the US Gov would have a huge impact on those balance sheets. This is completely apart from the widespread panic that would be unleashed by a US default. My interpretation of the report (and it is not long) is that the US needs to make credible moves to balance the budget. There is no imminent danger of default, but the current track is not sustainable forever, hence a negative outlook.
How do you reduce in this case. would you buy a binanry credit put option based on ratings downgrate or buy a credit spread call option in this case?
On twitter: @mikeallen Mike Allen regardless of validity, this is a time-capsule-ready milepost: “Standard & Poors Monday downgraded its credit outlook for the United States”
drk Wrote: ------------------------------------------------------- > How do you reduce in this case. would you buy a > binanry credit put option based on ratings > downgrate or buy a credit spread call option in > this case? I’d buy a credit call option because I don’t expect the US to default or the rating to be downgraded but fear could cause an increase in spread. But pray, what benchmark are we going to use to measure this spread?
me.tega Wrote: ------------------------------------------------------- > drk Wrote: > -------------------------------------------------- > ----- > > How do you reduce in this case. would you buy a > > binanry credit put option based on ratings > > downgrate or buy a credit spread call option in > > this case? > > > I’d buy a credit call option because I don’t > expect the US to default or the rating to be > downgraded but fear could cause an increase in > spread. But pray, what benchmark are we going to > use to measure this spread? So, you’re saying you would buy a credit spread option and sell a binary call option?
> no it’s not a downgrade I believe common usage is that any negative change in rating or outlook (e.g. from positive to stable) is a “downgrade” unless further qualified. At least when I speak with ratings folks.
Downgrade is a downgrade… watch negative means there is increased likelihood of a downgrade if circumstances don’t change.
With 10% adding to debt this year (with respect to gdp) the us is already outgreeking the greek…so this step is more than justfied. And its good for Bunds:)
ohai Wrote: ------------------------------------------------------- > It’s a bit weird for S&P to bring up the > possibility of a US debt downgrade while > maintaining that some US corporations are AAA > rated. But I suppose it’s more complicated than > that. AAA is not the same for countries and corporations. Remember those senior CDOs tranches were all rated AAA too. AAA is not the same accross industries.
> AAA is not the same for countries and corporations. Yes it is. For both it’s an opinion of likelihood of repaying obligations. The expected return on lending to an AAA government is the same as on lending to a AAA corporation. > Remember those senior CDOs tranches were all rated AAA too. Irrelevant. The risk models (many relying on Gaussian copulas) were broken. At the time of rating however the implication was that these tranches were as safe as any other AAA credit. > AAA is not the same accross industries. Yes it is. > It’s a bit weird for S&P to bring up the > possibility of a US debt downgrade while > maintaining that some US corporations are AAA > rated. Though the agencies widely respect a rating “sovereign ceiling”, they don’t have a similar ceiling relating to outlooks. I.e. there’s no real disconnect until the sovereign’s rating is actually downgraded. Then your point becomes interesting. There are many reasons for the ceiling, some of which are apparent if you consider the various triggers for a sovereign default (currency collapse, political uprising, etc.) and common consequences (expropriation). As firms become more global and less directly dependent on their home countries’ financial systems, it becomes increasingly reasonable however to reconsider the assumption of a sovereign ceiling. (The markets certainly have. For example, as of March, Energias de Portugal’s credit was trading more than 100bp tighter than Portugal.)
According to the ratings agencies AAA is AAA. But let’s return to the real world for a sec. Even before the mortgage meltdown, those supposed AAA Mortgageback securities were yielding way above comparable AAA corporates and sovereign bonds. The ratings agencies called them AAA but no one with half a brain believed that.
From a Moody’s report today (discussing European corporates). It goes into a lot of detail about how sovereign distress impacts corporates, and I recommend it if you can pull this report from moodys.com. “European Corporates: Improved Credit Outlook, But Sovereign Weakness Continues to Pose Risks”" "Only the strongest corporate ratings will be able to withstand a fall in the sovereign’s rating, and only where the corporates’ balance sheet and liquidity profile are extremely strong. We have commented extensively on how utilities’ ratings would be affected. The linkage between corporate and sovereign ratings might likely loosen in some cases when sovereign ratings migrate to the very low end of the rating scale. This is more likely if the sovereign debt restructuring process is considered likely to be orderly and not be accompanied by sovereign interference with corporates through tax or regulatory changes or debt moratorium provisions. . For other corporates with exposure to only one country, ratings are unlikely to remain more than two notches above that of the sovereign if the sovereign rating comes down. A rating of three notches above the sovereign would imply a probability of default significantly lower than that of the sovereign (in the order of 2x to 3x less than the sovereign). This might be achievable for corporates which are highly geographically diversified outside of the affected sovereign (in terms of revenues as well as operations), as is the case for Coca-Cola Hellenic (A3, stable) in Greece or CRH (Baa1 negative) in Ireland. But such instances are rare. “The linkage between corporate and sovereign ratings might likely loosen in some cases when sovereign ratings migrate to the very low end of the rating scale. This is more likely if the sovereign debt restructuring process is considered likely to be orderly and not be accompanied by sovereign interference with corporates through tax or regulatory changes or debt moratorium provisions.”