BBBeauty Is Certainly In The Eye Of The BBBeholder

A mere nine years ago, California's governator uttered his now infamous words that his opponent's income tax loophole was wide enough to drive his Hummer through. Now in 2012, Bloomberg's Chart of the Day has found another glaringly wide 'loophole' in common financial wisdom. As Sebastian Boyd and Ye Xie note, Ireland and Kazakhstan both belong to the same BBB-rated S&P cohort and yet have debt/GDP loads of 106% and 11% respectively. While debt/GDP is not the sole arbiter of credit quality (ask the Americans) it seems the market is more than willing to effectively differentiate based on this as is clear from CDS levels; but the growing pile up of sovereign nations in this edge-of-the-cliff rating bucket suggests two things to us: 1) "The entire rating system is flawed" as Bloomberg notes; and 2) The self-destroying (or reflexive) nature of a non-investment grade rating shift is now seemingly totally politically motivated (as opposed to quantitatively defined) - perhaps nowhere better signaled than an unwillingness to downgrade Spain yet willingness to downgrade its regions. For your risk comprehending pleasure, we present - the BBBs!


A smorgasbord of BBB-rated sovereign nations - ranked by debt/GDP ratio...

For both collateral-constrained and mandate-driven reasons, a non-investment grade rating ha sfar greater import (it seems) than its actual credit spread... though the market is better at differentiating credit quality, ratings remain 'important' - but with the market itself in some ofthe peirpheral European bonds becoming increasingly illqiuid and easily manipulated by the sheer size of domestic interests, the 'winning' answer it would seem - once again - is not to play (as market levels have lost their signaling capability via intervention and ratings have become increasingly politicised).



Source: Bloomberg