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?.

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)?