Ratings

Europe during the Middle Ages lived the scourge of the Inquisition, were times of religious persecution in which to prove that there wasn't demoniac was a difficult undertaking, since it had to survive the "judgments of God," torture by the which could only be saved by divine intervention, as it was physically impossible to save.

Something similar happens to us today, countries can not escape the inquisition courts organized by the rating agencies.

Just today, the governor of the Bank of France, also is a member of the ECB, has once again questioned the objectivity of the above agencies to the new threats that have been announced with great fanfare. Threats, curiously, raged just before the EU Summit and after the covenants laid down by them.

They are responsible for continually sabotage any progress, however minimal, putting everything into question. It also states that agencies have a bias because they "forget" that the UK is probably worse than their European counterparts former (the UK are not Europe).

This afternoon, S & P has also lowered the rating to 10 Spanish financial institutions, including CaixaBank, Sabadell and Popular.

Not content with the reduction has already warned that in the next four weeks can drive them to downgrade again.
What has changed in 4 weeks? Why does this leak? What do they know or do not know?

The following table represents the historical probability of default depending on the rating assigned.

As you can see is corporate and municipal bonds. The level of "investment grade" is lost below BBB.

The rating is assigned to CaixaBank A to S & P assigned a default rate of 3%.

Importantly, in the worst cases, the default rate for speculative assets, junk bonds, is 42.35%. Less than half, so not quite understand the panic generated by any redevelopment except that the problem is that nothing seems to add up.

Cumulative Historic Default Rates (in percent)

Rating categories	Moody's		S&P
	Municipal	Corporate	Municipal	Corporate
Aaa/AAA	0.00	0.52	0.00	0.60
Aa/AA	0.06	0.52	0.00	1.50
A/A	0.03	1.29	0.23	2.91
Baa/BBB	0.13	4.64	0.32	10.29
Ba/BB	2.65	19.12	1.74	29.93
B/B	11.86	43.34	8.48	53.72
Caa-C/CCC-C	16.58	69.18	44.81	69.19
Investment Grade	0.07	2.09	0.20	4.14
Non-Invest Grade	4.29	31.37	7.37	42.35
All	0.10	9.70	0.29	12.98

 One last fact, these are the probabilities of the bonds issued by municipal entities and corporate that have historically had actually default experiences. In the case of countries, should we assign the same probability or is even smaller?

In Spain we are talking (AA-) of a lower default probability of 1.50%. Does it explain the spread is likely to be paid in relation to German bonds?.

Moral hazard

I would like to highlight several recent article, first is an interview with Juergen Stark, ECB chief economist resign shortly to disagree with the policy of the ECB. The other is the article published by Nobel Prize Stiglitz and a statement (rather than paper) from the French president Giscard d'Estaing on the visit to Europe by U.S. Treasury Secretary Timothy Geithner.


In the first, Stark, says basically that the ECB should ask for help since this is a moral hazard. If allowed to help governments "sinners" will not have his "punishment", so in the future does not adequately correct the imbalances. You may forget that they are special circumstances which have focused on certain countries to this situation, except for Greece, other countries have a growth problem, not debt. The markets believe that they are not paid for what they believe incapable of generating income to the debtor countries, not why your debt is exorbitant.


Stglitz reminds us that debt levels have been caused by an excess of liberalism in the financial markets, taking advantage of deregulation have failed to properly quantify the risks. The states have borrowed to save the financial system from collapse result of the greed (greed is good) of some and the overconfidence of others.


Giscard makes the counterpoint of classical Europe, that of the "grandeur". Who are the Americans to teach us? We know sink alone.


At a time when we discuss the role of the ECB contradistinction precisely with the Federal Reserve and the myth that expansion policies with recession generate long-term inflation. The curve of U.S. 10 years should be through the roof in that case. Why markets continue to provide cheap money to the Americans with current account deficits have? Trust ¿?.


How can we generate in the euro zone that trust?