Tuesday, December 6, 2011

Standard & Poor's

S&P (Standard & Poor's) as well as Moody's and Fitch Group are risk rating agencies. Develop and regularly publish the credit rating of stocks and bonds, as well the sovereign risk debt issuers. 
S&P is owned by McGraw-Hill group.

So far nothing that is not abnormal, we have a company that helps along with two other at investors to know what the compensation to be required for the purchase of assets issued by governments and businesses. Criteria are based on macro and micro. If an economy is in recession, produce less, consume less and therefore earn less in taxes.

Economists use elasticity to explain how prices are adapted to the reality of things. The government revenues are highly elastic, lowering the activity immediately moves to the amount that is collected, however, the other side of the equation, the costs are quite inelastic, there are some items that can be cut effectively with fairly easily but the most important, require a period of accommodation. These are measures that affect many people, teachers, doctors, policemen, judges to put the best known, who nevertheless have their rights. A quick measure is to reduce payroll, but the cut, not being excessively high payroll, is relative. The savings must come from the rationalization of the use of resources more efficient and requires planning, ie time.

On the one hand, the adjustment is immediate (income) and not the other (expense). As they are also measures that affect people, leaders are reluctant to take action based on assumptions. The optimum would take action before they occur is anticipated that the event will happen. If the measurement is taken when we're in recession, the first effect is procyclical, so that, finally, just what we wanted to avoid getting worse. When revenues fall and spending increases, and want to maintain the level of activity and welfare of an economy, there is debt, and that has a cost, interest rates; and one limit, the capacity allocated by the market's to return loans (based on ratings).

The strength of S&P and other agencies is the fact that their values ​​are taken into consideration by the governments themselves, by the monetary authorities and the markets to set interest rates. A greater risk of default higher interest rates required to economies.

S&P has warned tonight in a statement that in the coming days, if possible before the summit on december 9th, it will issue a new downgrading the ratings of all countries in the euro area and most likely will be downgraded to all.

What gives us a new note which tells us that things will go wrong (we know) and just the very issuance of the note will actually cause things to go worse (and we fear)?

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