Comments on: The downgrade FAQ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Danny_Black Mon, 15 Aug 2011 18:52:50 +0000 klhoughton, you might be waiting a while for that trade to pay off given S&P cut long term ratings only.

Mr Salmon, you are off course assuming that the liabilities are not inflation linked. The UK for instance has a ton of off-balance sheet debts that would make Enron blush but apparently not Gordon Brown. They are for the most part inflation linked. The unfunded public sector pensions are also inflation linked. No idea about the US but would be suprised if there is not also a bit of this monkeying about.

By: AlexBBB Tue, 09 Aug 2011 18:30:44 +0000 What if S&P has actually done us a bizarre, accidental, and backhanded favor? I think most (ok, many?) people would agree that based upon historical spending and revenue numbers (as percents of GDP) that expenditures have to go down significantly, but revenues have to come up quite a bit, as well. This just completed debt ceiling negotiation was thus sub-optimal in that it had no revenue component. It ended up that way because Democrats wanted revenue increases, Republicans wanted no revenue increases, and Republicans were willing to negotiate in a more forceful manner. Put simply, Republicans threatened to let us “default” if they didn’t get the package they wanted, and Democrats were unable/unwilling to accept that.
That relationship appears to be the core of what S&P used to support the downgrade. They have been clear however, that there is no risk that principal (or interest) won’t be repaid, merely the possibility that for political reasons these payments might be delayed while the sausage gets made.
Maybe this is a benefit. If the risk of such a default (short term, no haircuts, etc…) is priced in, then that strategy loses its effectiveness. If whatever party is being (slightly) more reasonable in the future can say “no, I won’t agree to that,” with the knowledge that the market understands that there may some payment delays but there is absolutely no risk of non-payment, perhaps there is a chance that we’ll get an agreement that moves us significantly towards a balanced budget.

By: retr2327 Mon, 08 Aug 2011 16:52:31 +0000 “That said, I do think that there is real compartmentalization going on at S&P, in particular between the structured-credit group and the sovereign group. The two groups have very little in common and mistakes at the former don’t commute automatically over to the latter. I’m willing to believe that the sovereign group has some kind of integrity even if the structured-credit group didn’t.”

Correct me if I’m wrong, but isn’t a signficant part of this based on the fact that the rating agencies got paid by the entities putting out the structured-credit products, whereas they do not get paid by the sovereigns whose bonds are being rated? (More a matter of subtle corruption than competence, to my mind . . .)

By: billyblog Mon, 08 Aug 2011 15:58:20 +0000 Felix,  /2011/08/08/why-s-p-s-ratings-are-subst andard-and-porous/?hp

Read it, weep, and then go wash your mouth out with regression analysis soap for even suggesting that there was reason to trust S&P in its downgrade – even in its political judgments.

And don’t even be tempted to try to seize on the part where Nate says:

“None of this is necessarily to disagree with the downgrade in the United States’ rating. A rating system based on objective factors, like debt-to-G.D.P. ratios, might plausibly have the U.S. rated even lower than AA+.”

Because that’s where Nate’s statistical expertise leaves off and Krugman’s macroeconomic picks up on how to analyze debt-to-GDP levels in the case of the U.S. In short, the seeming life-vest that this throwaway remark of Nate’s offers is actually a noose for you, because it puts us squarely back in “gussy[ing] up” econometric territory, which you have argued is not the point.

By: Auros Mon, 08 Aug 2011 15:39:30 +0000 “Remember all that empirical mathematical veneer in the statement — it’s there to make the rating look Statistical.”

This is why the $2T error in baseline is so damning. S&P is plainly incompetent at assessing the credit of sovereigns. The actual stats show that they systematically overestimate the risk of defaults by both sovereigns and sub-sovereigns. They try to maintain the illusion of having some kind of special expertise, but the fact is that anyone who actually WAS better than average at that kind of judgement would go work for an actual bond trader, rather than going to work for a ratings agency. The pay is poorer at S&P, and they’re not actually allowed to exercise their judgement, because political considerations (buttering up private bond issuers and furthering the party line of the CEO class) override any actual analysis.

Also, what Cedare and golew said.

By: billyblog Mon, 08 Aug 2011 15:34:30 +0000 Methinks I detect some long term CYA going on in Felix’s answers to some of his critics.

But let’s take one more run at this by going back to Felix’s Friday post, the one he offered “even in ignorance of the details” for why the downgrade had been delayed.

Thus, at: 11/08/05/why-the-sp-downgrade-was-delaye d/

Felix presents the argument that political realities, at least as he saw them, completely trumped “econometric” factors, as he calls them, as a rational basis for the downgrade:

“[T]he US does not deserve a triple-A rating, and the reason has nothing whatsoever to do with its debt ratios. America’s ability to pay is neither here nor there: the problem is its willingness to pay. And there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default. The Tea Party is fully cognizant that it has been given a bazooka, and it’s just itching to pull the trigger. There’s no good reason to believe that won’t happen at some point.”

Now, let’s stipulate that Felix Salmon – and, in the face of the existing evidence, but what the heck, for the sake of argument, the boys at S&P too – are competent when it comes to “econometric” matters.

It does not follow from this that Felix’s – not to mention S&P’s — political judgment, “There’s no good reason to believe that won’t happen at some point,” where “that” is the Tea Party crowd actually getting what Felix thinks is their wish for an actual default, has any more credibility as an informed judgment than, say, my own.

What to do? What to do?

Well, how about we turn to some perfectly respectable analysis from what I’ll call the Political Science wing of the expert spectrum, which suggests strongly that even the Tea Party crowd had its bluff called and backed away from the abyss of default as a result.

You can find it here, at Nate Silver’s blog:  /2011/08/01/what-the-white-house-left-o n-the-table/

After reading Nate – who does not mention Felix and why would he since Felix is not in the business of tracking actual votes and Nate is – I’m minded to adapt Felix’s obiter dictum to apply to, well, Felix:

“You can gussy up your rationale for why there is good reason to think that there will be a default in the future with as many of your ersatz intuitions as you wish about how the political process works, but at heart it’s a matter of how we can expect politicians to actually vote.”

Not to mention how they actually did vote.

Watch what they do, Felix, not what they say – or said.

Oh, and there is another place we can look to see whether we should be as concerned as Felix is about the materially increased probability of a default down the rod. It’s called, um, the market. And I’m overwhelmed by the how spooked the market is right now about that increasingly probable default — as they pour into Treasuries and send down the yield.

But, of course, Felix does his CYA dance on that one too – without for a moment noting that this downward movement in the yield does not lend what any reasonable person would call support to his argument that it’s all about political will.

As a final note, I’m still waiting for Felix to prevail on someone at S&P to send him a red-lined copy of their downgrade document, you know, with the econometric reasoning – and not just the phony numbers – contained in it. Let everyone decide for himself whether the political argument was always a slam dunk and in no need of econometric gussying up.

By: jomiku Mon, 08 Aug 2011 15:14:41 +0000 Take your point #1. Look at the word: S&P said “discretionary”. They didn’t say “non-defense discretionary” and they easily could have. One can’t argue our military spending is under control. Heck, the chiefs of the services argued 2 weeks ago that we need to spend more, not less because who knows how many wars we may have to fight.

The problem is the GOP will take the issue and limit it to “non-defense discretionary”. So they’ll nickel and dime: reduce appropriations to the EPA, cut even more funding that helps pay for college. The total they can cut is a pittance compared to the defense part of the discretionary budget but that’s the insanity. The head of Tea Party Nation posted that we need to build more aircraft carriers one week after he argued we need to cut spending.

By: ErnieD Mon, 08 Aug 2011 14:44:42 +0000 I think that S&P (and the other ratings agencies) blew up much of their credibility a few years ago.

I think that the current market action is reacting to far more than the S&P downgrade, especially since Treasuries are RISING! which is the opposite of the normal response to a downgrade.

Three major issues in play here:

1. Movement towards austerity budgets in Europe and US;
2. Central banks trying to create fake money to pump into unproductive financial system; and
3. European and US political leadership behaving like unruly kindergarten class.

I think the markets are staring at the outcome of these three themes as Depression and Deflation which is why it is the stock and commodity markets imitating a falling rock while precious metals and large country bonds are rising.

The S&P downgrade is just white noise.

By: klhoughton Mon, 08 Aug 2011 13:58:59 +0000 “And I’m not saying that S&P has learned from its mistakes. I’m just saying that they’re not making the same mistakes again.”

Now this is sheer lunacy. S&P–whose sin was too use models that understated risk in setting overcollateralization requirements for MBSes–misstates the amount of collateral available (93% v 85% per its projections) and then says, “Well, the collateral available doesn’t matter.”

True, they’re claiming that something that is overcollateralized is undercollateralized, instead of the reverse, but it’s Really Silly to claim that they’re making “new” mistakes.

If you really believe S&P, put your money where your mouth is: shift your investment account allocations into French or UK bonds (both still AAA) and short US ones.

By: golew Mon, 08 Aug 2011 13:42:27 +0000 Let me get this straight. S & P is defined as a “Nationally Recognized Statistical Ratings Organization, ” BUT “[r]emember all that empirical mathematical veneer in the statement — it’s there to make the rating look Statistical.” So they are making a political statements beyond their recognized mission and phony them up (called “veneer” in polite circles) with authority from their recognized mission by pasting the two together. Hmmmm. Furthermore, is this rating down grade somehow meant to please their largest customers demands? S & P was only pleasing its largest customers in the CDO rating debacle, weren’t they? Are they now pure?