Monday, August 08, 2011

The Curious case of the S&P

A man is known by the company he keeps, was something told to me ages ago in a Moral Science class - a not-so-liked 8 AM class, in school. A true example of which I got to see from very interesting times in global markets! For all the dreary, sad, somber economic news doing the rounds, the least one can do is to (like self-help artists would say), 'step back and look at the situation'.

So, Obama came into office after inheriting an economy in a shambles. People believed they had not elected a President, but rather Mandrake the Magician (With the wand), Superman (out of this world capabilities) and Batman (if not anything, maybe Bruce Wayne's resources) rolled into one, to office! And so, when the economy sputtered, stalled, regressed, threatened to sink, there were cries of 'Oh No! US might default on its loans.' In the wake of PIIGS (not the cute tailed pink oink oink creature, but rather the mild name given to Portugal, Italy, Iceland, Greece and Spain  who look all set to go down under, unless Chancellor Merkel works her magic wand), everyone imagined a PIIGSU! They were afraid of uncharted territory, where risk free rate of return would no longer be treasury rates. Afraid of the face loss in case the US defaulted. Afraid of the country's debt being downgraded. So after two weeks of political tamasha, with Republicans acting like the typical 'chick flick leading ladies', who in their heart of hearts want to be wooed by Prince Charming, and yet wish to play hard to get. They did not want the accompanying face loss of default, while at the same time did not want to relent to Democrat plans! Outcome, in typical Cinderella style, the deal was signed by the stroke of midnight! Well almost, 'the stroke of midnight' was for a dramatic effect. The default was averted, Government salaries would be paid, over time prudence shall prevail. Amen - was the belief.

But then, in Munshi Premchand novel style, we have an anti-climax. S&P still downgraded the US to AA+. Note, Moody's and Fitch maintained AAA. Much ado over nothing? Clearly! 2 weeks of political blahblah, and the outcome was the same. If anything, further stimulii have been effectively canceled owing to the deal! Optimists believed that the downgrade might lead to weaker USD, better exports, and a probable recovery. But as markets are quick to reveal today, all kinds of cracks are showing up. Stocks tanked, oil stank, Gold soared. What do you do, when safe haven currency gives you the slip? Buy that which women shall covet forever. Not Adonis, but Gold!

Not just so much, but everyone associated with Treasuries is being downgraded unceremoniously too. Clearly S&P has been rubbed on the wrong side by the Government as a whole. So first the Govt was downgraded, and now anyone with a glut of Treasuries faces downgrade. The Saint of Omaha, who is famous for his own Coke story and for famously declaring in the wake of the debt crisis that US needs a Quadruple A rating, finds his Berkshire Hathway demoted from AAA. Why? Because he holds Treasuries.The question here is - what happens to the largest holder of Treasuries? As in, the mighty fire-breathing Chinese dragon? Do we downgrade the country to the level of junk?

And a bigger question is - why exactly should we believe S&P? Weren't they the ones responsible for the credit crisis in the first place? FannieMae and FreddieMac believed S&P ratings while securitizing mortgages, faced a beating, and now S&P has the nerve to downgrade them too?!!!? In summary, all one can say is that the Great Recession story just got curioser and curioser!!!

1 comment:

Anonymous said...

Problem is with the lawmakers. vested interest or the situation adopteg Credit agency. Everytime the Agency says something unfavourable, that country questions the veracity of that comment while it is prepared to accept similar comments in case of others as an ultimate analysis!!! Where are we