Greece Downgraded - are we next? Read this.

[volinbham]

The Death of the Triple-A Sovereign - Real Time Brussels - WSJ

Are we witnessing the end of the gold-plated triple-A-rated sovereign borrower? Willem Buiter, Citigroup’s chief economist and a noted academic, thinks so.
In a new piece of research, released today, the former member of the Bank of England’s Monetary Policy Committee argues that in five years’ time, there will be no top-rated governments left.
The good news in his 68-page report on Sovereign Debt Problems in Advanced Industrialized Economies is that, on the whole, governments won’t default. The bad news: Most will have to embark this year on five or 10 years of severe fiscal austerity.

He says the current market focus on the five weakest members states of the euro zone is surprising given that the fiscal and financial position of the euro area as a whole is stronger than that of the U.K., the U.S. and Japan. Sooner (the U.K.) or later (Japan and the U.S.), these three countries are at risk of being denied access to new funding “unless there is a radical change of course by those in charge of fiscal policy.”

To get the debt on a sustainable path, he says that the U.S. will have to slice at least 7.3% of GDP permanently from the budget deficit; and the U.K. at least 6.8%. “In neither country are policy makers debating how to achieve anything like these degrees of fiscal tightening,” he writes.

 

[BigPapaVol]

There is definitely a point where US paper will no longer be considered the risk free rate.

 

[droski]

personally i don't think anyone would have the balls to downgrade the US. at least for not a long time. particurally with the pressure the gov't can put on the rating agencies in this current environment. the sec could easily go after them pretty severly for their actions the past couple of years.

 

[BigPapaVol]

personally i don't think anyone would have the balls to downgrade the US. at least for not a long time. particurally with the pressure the gov't can put on the rating agencies in this current environment. the sec could easily go after them pretty severly for their actions the past couple of years.

That is probably true, but only in name. Investors will price the paper where it should be.

 

[volinbham]

the part I found most interesting is the amount of spending cuts necessary to show the fiscal responsibility that merits the rating.

 

[droski]

they will, but the question is who is safer? it will still be the gold standard for risk free paper. why? there isn't an alternative.

 

[BigPapaVol]

they will, but the question is who is safer? it will still be the gold standard for risk free paper. why? there isn't an alternative.

I think that's right, but it will start to change all of the theoretical crap that is based on Rf.

 

[droski]

I think that's right, but it will start to change all of the theoretical crap that is based on Rf.

agreed, but anyone currently basing investment decisions off of modern portfolio theory is already years behind the curve. the academics certainly will have some nice research projects, but i'm not sure it will effect the market much. edit: you do make a good point that a lot of the option pricing models will have to be adjusted

 

[kev20]

I don't know anything about this stuff, but what could this possibly mean for me when the fiancee and I finally get serious about our wedding plans in Greece?

 

[droski]

I don't know anything about this stuff, but what could this possibly mean for me when the fiancee and I finally get serious about our wedding plans in Greece?

means your wedding might be a lot cheaper.

i'm already counting the $$$$ i'm saving for my honeymoon in italy by the euro dropping from 150 to 131 and i think it will continue to drop well into the summer.

 

[kev20]

means your wedding might be a lot cheaper.

i'm already counting the $$$$ i'm saving for my honeymoon in italy by the euro dropping from 150 to 131 and i think it will continue to drop well into the summer.

that's what I like to hear.

 

[volinbham]

Hope you are not staying in one of the riot zones. Enjoy your trip.

(edited my comment - I meant not staying in one the riot zones; it's a joke. nevermind)

 

[Velo Vol]

As bad as things look here, it apparently still beats the alternatives, as U.S. bond yields plunged today when the stock market tanked.