Wednesday, 15 February 2012

Valentine's day marred by Moody's

Guy Foster looking dapper
If I were to arrive at work in tracksuit bottoms, in place of my more usual tailored trousers, colleagues would remark: "Mercy! Witness Foster's slipped sartorial standards!" My good reputation rubbished, I would mend my ways and life would go on. This is what is called an autonomous stabiliser - the natural response of the individual to pressure exerted by the collective. It is what makes markets work, it is why we all dress smartly in the office rather than lounging around, clad in grey marl like a celebrity at the supermarket.

Then, imagine, some months late a single colleague rushed into the office shouting "Foster wore  tracksuit bottoms! Hear one, hear all!  Tracksuit bottoms I tell you - as I live and die!" He or she would be rightly ignored.

Out of date and uninformative news is, it seems, listened to only if the issuer has the coveted status of a nationally recognised statistical rating organisation (NRSRO) for they direct investors with the regard to their investable universe.

The substance of ratings agencies' exclamations are invariably pondered by the literate world months before their unveiling, and yet the newswires fizz with excitement. Yesterday's papers were plastered with headlines that these peddlers of institutionalised understatement have formed an opinion on the EU. And that opinion is?

"Moody's Investors Service has today adjusted the sovereign debt ratings of selected EU countries in order to reflect their susceptibility to the growing financial and macroeconomic risks emanating from the euro area crisis and how these risks exacerbate the affected countries' own specific challenges."

Turns out things are a bit tricky economy-wise across the channel eh?

From the UK's perspective Moody's offers nothing useful. Whilst bemoaning the weakness of growth, they emphasise the necessity of austerity. The message for the chancellor? Keep going, but better. We suspect that the likelihood of a cut remains remote, if only because the UK will be flattered by cross channel comparisons. 

Given the current political climate, France is more likely to be cut, which is clearly an important issue of national pride.  From a more practical perspective it may have significant consequences. Misery, after all, loves company, while schadenfreude craves solitude.

As the pool of sovereign's carrying the highest credit rating continues to decline, those retaining it will benefit (as gilts have).  The contentions of commentators that French and US bond markets (both already cut by Standard & Poor's) are ratings-agnostic (including such nonsensical platitudes as "AA is the new AAA"), reek of complacency. Both still have the highest rating in the eyes of Moody's. Were this second leg to be pulled away there remains a meaningful chance that the highest quality liquidity and government bond investors would become forced sellers, putting upward pressure on interest rates.

Somewhat reactionary as they may be, Moody's mood swings matter.


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