Greek Debt Ratings
Moody’s has downgraded its rating on Greek sovereign debt:
Greece debt rating cut further by Moody’s
Moody’s has downgraded Greece’s debt to “highly speculative” prompting an angry response from the finance ministry. Greek bonds fell after the rating agency cut its rating from Ba1 to B1.
Moody’s cited “endemic tax evasion”, “very ambitious” austerity plans, and the possibility that the EU may force a debt restructuring on Greece after 2013 as reasons for its decision.
Greece’s finance ministry said the move was “incomprehensible” and called for tighter regulation of rating agencies.
“Ultimately, Moody’s downgrading of Greece’s debts reveals more about the misaligned incentives and the lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy,” said the Greek finance ministry in a statement.
“Having completely missed the build-up of risk that led to the global financial crisis in 2008, the rating agencies are now competing with each other to be the first to identify risks that will lead to the next crisis.”
I have to say, I agree completely with the sentiments expressed here by the Greek finance ministry. In my mind, the credit rating downgrades have become a lagging indicator of problems, and have demonstrated little or no predictive power. Take a look at the chart below.
The blue line shows the interest rate spread on long-term Greek government bonds over the equivalent bonds issued by the German government. The other two lines show the ratings assigned to Greek sovereign debt by S&P and Moody’s since January 2008, normalized so that they’re on the same scale.
The question I ask myself is this: would paying attention to ratings have helped me make (or save) any money on Greek debt? If we assume that the market is charging the Greek bonds a higher interest rate to compensate for the higher chance that the Greek government will default, then the interest rate spread is a rough measure of the market’s estimation of the likelihood of Greek government default. The market seems to pay little attention to credit ratings, and if I had used the credit ratings as a cue to buy or sell Greek government bonds, I can’t see that it would have provided me with any benefit.
But this has become completely typical of credit ratings in recent years – just think about how badly they mis-rated a giant swathe of assets leading up to the financial crisis of 2008. All in all, I’m not quite sure why we should care about what rating Moody’s and S&P assign to Greece’s sovereign debts – or any other debt, for that matter.
“The question I ask myself is this: would paying attention to ratings have helped me make (or save) any money on Greek debt?”
So the ratings suggest sell in Dec09 at a 3% spread, sell Apr10 at a 5% spread, and sell everything in Jun10 at a 7% spread. Apparently this is a strategy that would not have saved you money compared to holding bonds until the spread hit 9%. Maybe I should have asked this question first, are you aware that prices and yields have an inverse relationship?
“just think about how badly they mis-rated a giant swathe of assets leading up to the financial crisis of 2008.”
The credit rating agencies disclosed their assumptions for asset (home) values underlying their structured finance ratings. If you want to determine whether you can trust their ratings for sovereign debt you should read the underlying assumptions.
Also, are you putting your money where your mouth is? Are you hoarding Greek debt?
FEDERAL BUDGET REALITY CHECK 2.0
Mandatory Spending, Net Interest Payments, and the General Fund
Absent major changes in law, the financial impacts on the General Fund budget from Medicare and Social Security OASDI reimbursements as well as general financing for Medicare, Medicaid, and “Other Mandatory” programs together with Net Interest payments on publicly held debt should be viewed quite seriously considering the related reduction of discretionary spending.
A growing portion of Federal discretionary spending will be crowded out, regardless of whether taxes are raised or not. A sizeable percentage of future tax increases, by necessity, will be devoted to supporting the financial requirements of net interest payments and mandatory programs funding, whether involving reimbursements to Medicare and Social Security trust funds or direct funding to Medicare, Medicaid, and Other Mandatory programs. The growth of these General Fund outlay requirements will become apparent in the latter part of this decade and throughout the next decade. As a point of reference, note the Net Mandatory and Net Interest funding obligations growth in the following comparison between FY2011 and FY2020.
Net Mandatory and Net Interest demands on General Fund direct financing and reimbursements (Medicare and SS) are as follows:
Projected Net Mandatory and Net Interest Outlays of the General Fund
Fiscal Year 2011
$50 billion – Social Security OASDI
$301 billion – Medicare
$276 billion – Medicaid
$713 billion – Other Mandatory Programs
$205 billion – Net interest
$1,545 billion – Total Net Mandatory and Net Interest outlays
Fiscal Year 2020
$101 billion – Social Security OASDI
$417 billion – Medicare
$563 billion – Medicaid
$741 billion – Other Mandatory Programs
$863 billion – Net Interest
$2,685 billion – Total Net Mandatory and Net Interest outlays
FY2020 Net Mandatory and Net Interest outlays represent a 73.8% increase (+$1.14 trillion) over FY2011 outlays.
Projected Net Mandatory outlays of the General Fund for 2012-2021 include $3.393 trillion for Medicare, $4.387 trillion for Medicaid, and $6.555 trillion for Other Mandatory programs. Medicare and Medicaid financing requirements are projected to continue to increase during the next decade.
Social Security OASDI funding reimbursements from the General Fund take on far greater significance from FY2021-2030 as such financing requirements increase to roughly $3 trillion. This represents a $2.7 trillion increase over the FY2010-2020 General Fund reimbursements of roughly $300 billion.
Net Interest payments will more than double during the next decade as such funding obligations are projected to exceed $1 trillion per fiscal year no later than FY2022. The increases are independent of a spike or significant run up in interest rates prior to FY2022. Net Interest payments during the period FY2021-2030 may exceed $14 trillion.
Obligations classified as Other Mandatory funding are noteworthy due to the current level of funding requirements placed on the General Fund. OMB projections do not indicate much growth in the funding requirements of such programs based on the FY2012 Federal Budget proposal. Whether those projections hold in the future is another matter. It may be the case that crowding out of discretionary funding is anticipated to also flow over to Other Mandatory funding, which excludes reimbursements for Medicare and Social Security OASDI, and direct funding for […]