Reuters blog archive
As the debate continues over public pension funding levels, we have this headline from the Financial Times this week: “US States need $980 billion to fill pension gap, says Moody’s.” This is not exactly news. A number of studies, including ones from the Pew Trust and the Public Fund Survey, have identified a massive shortfall for public pension funds. In fact, the Pew Trust said that the shortfall in 2010 was $1.38 trillion, so perhaps we should be applauding state legislatures for improving the gap since then.
The shortfall numbers in these studies, to put it simply, are all over the place. There are many variables that go into these models, but the main factor that causes variation is the expected rate of return on the assets in the plans. The official assumed return on the assets that are held in trust to pay pension liabilities is 8 percent, according to the Public Fund Survey. Fiddling with this projected rate of return can cause swings in the amount of unfunded liabilities. The Moody’s study uses an unconventional assumption. According to the Adjustments to state pension liabilities document:
Accrued actuarial liabilities will be adjusted based on a high-grade long-term taxable bond index discount rate as of the date of valuation (of the fund).
Rather than using the average historical investment return rate of 8 percent, Moody’s uses a return on a taxable bond index. This return would be no higher than that on a basket of high-rated corporate bonds ranging from 4.4 to 6.2 percent, the FT says. The problem with using this rate is that we have been in a five-year period of zero-interest rate policy while the Federal Reserve has artificially suppressed interest rates to promote financial stability and spur economic growth.
from India Insight:
Fitch Ratings revised India's sovereign rating outlook to "stable" from "negative" on the back of measures taken by the government to contain the budget deficit, it said in a statement on Wednesday. The rating agency had cut India’s outlook to negative in June 2012 and currently has a 'BBB-' rating for the country.
“Fitch expects the government to broadly meet its FY14 budget deficit target of 4.8 percent of GDP (including privatisation receipts) and to gradually reduce the high level of public debt over the medium-term,” the rating agency said.
from Global Investing:
We wrote here yesterday on how Turkish hard currency bonds have been given the nod to join some Barclays global indices as a result of the country's elevation to investment grade. Turkish dollar bonds will also move to the Investment grade sub-index of JPMorgan's flagship EMBI Global on June 28.
Local lira debt meanwhile will enter JPM's GBI-EM Global Diversified IG 15 percent Cap Index -- the top-tier of the bank's GBI-EM index. But the big prize, an invitation into Citi's mega World Government Bond Index, is still some way off. Requiring a still higher credit rating, WGBI membership is an honour that has been accorded to only four emerging markets so far.
Spanish government bonds have had a good run since the European Central Bank said it would protect the euro last year. But some analysts say the threat of a rating downgrade to junk remains an important risk.
Credit default swap prices are discounting such a move, according to Markit. Spain is only one notch above junk according to Moody's and Standard & Poor's ratings, and two notches above junk for Fitch. All three have it on negative outlook. Bank of America-Merrill Lynch says it sees a “high probability” of a sovereign rating downgrade in the second half of the year.
By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The only question had been which rating agency would shoot first. Moody’s did the deed, removing the UK’s triple-A rating on Friday. It is a political humiliation for the UK government, but the downgrade also removes that lingering expectation of being gunned down. The irony is that the humbling may help the UK achieve recovery sooner - and without firing another monetary policy shot in the currency wars.
The credit rating agency Moody’s is in a very delicate position. Its arch rival, Standard & Poor’s, was recently charged by the U.S. Department of Justice alleging that S&P committed mail and wire fraud by defrauding investors with faulty ratings. Moody’s was not charged, but there are a lot of questions about why it was left out of the investigation. At the same time, Moody’s is responsible for judging the creditworthiness of the U.S. government’s debt. There is little wonder that the rating agency is being very transparent in the benchmarks it is using.
Moody’s current rating for U.S. debt is Aaa (negative), which means that it could be downgraded. Unlike Paul Krugman and others who want the nation to issue more debt to attempt to spur economic activity, Moody’s wants the U.S. to reduce its debt-to-GDP ratio to improve its credit quality. In a detailed analysis, Steven A. Hess, Moody’s Senior Vice President, lays out what the agency is watching and the metrics it will use to judge the actions of Congress and the President.
from The Great Debate:
The credit rating agency, Standard & Poors, announced Monday that it was the target of a civil lawsuit by the Justice Department for its actions in rating the complex securities that played a major role in the 2008-2009 financial collapse. The company also said that it had not been apprised of the details. It is interesting that the other two major rating agencies, Moody's and Fitch made no announcements.
There is much that all the agencies should worry about. What is publicly known -- and it is a great deal -- was laid out in the two-year Senate investigation led by Senator Carl Levin (D-Mich.), which ended with the release of a final report in spring, 2011.
from Global Investing:
Adversity is a great leveller. Just look at the way sovereign credit ratings in the developed and emerging world have been converging ever since the credit crisis erupted five years ago. JPMorgan has crunched a few numbers.
Few were surprised last week by S&P's decision to cut the outlook on Britain's AAA rating to negative. That gold-plated rating is becoming increasingly rare -- according to JP Morgan, just 15 percent of global GDP now rates AAA with a stable outlook -- a whopping comedown from 50 percent in 2007. Only 13 developed economies are now rated AAA, compared to 21 before the crisis. And only one, Australia, now has a higher rating (AAA) than in 2007 -- 16 of its peers have suffered a total of 129 downgrades in this period. With 20 rich countries on negative outlook, more downgrades are likely.
from Money on the markets:
A battered government has some good news to cheer this week. First, rating agency Moody's kept the country's rating outlook at stable, providing a breather after two other global firms downgraded it to negative.
Goldman Sachs on Thursday upgraded Indian equities to 'overweight' from 'market-weight'. The Wall Street investment bank has cited a recovery in growth and inflation moderation going ahead as reasons for its upgrade. It has set an end-2013 end target for the Nifty at 6,600 points, a 14 percent upside from current levels.
from Global Investing:
Moody's disappointed a lot of folks this week when it failed to raise Turkey's credit rating to investment grade.
After Fitch upped Turkey on Nov 5 into the coveted top tier, hopes were high that Moody's would do the same and soon. Being rated investment grade by at least two agencies has a lot of pluses . But all the subsequent investment inflows have side effects and one of them is currency appreciation. Check out these graphs. (click to enlarge)