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Of Markets and Men

Dilip Ratha's picture

Fitch has confirmed AAA rating for the US. See attached news item.

The reaction to the recent S&P downgrading of US credit was surprisingly strong, and unwarranted. Because it is difficult to tell the difference between AAA and AA debt from the pricing and structure of any debt. The rate-and-rating schedule tends to be very flat in the beginning. An example of this schedule for the emerging markets is shown in an old chart below - some one should extend this chart to AAA and update it to a recent year.

Source: New Paths to Funding, Finance and Development, June 2009

I think the political rhetoric - "We are the United States of America" - scared investors. While government office-bearers often think of the financial market as "them", the reality is that the market is fragmented and highly competitive. No one investor can take the financial hit that can result from political actions or even verbal threats. So investors feel lonely, and panic, when addressed directly by politicians (recall Mahathir blaming Jewish conspiracy during the Asian crisis....).

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