Moody Fantasy

The attention given by the Mainstream Media to the downgrading of British debt by Moody’s to slightly less than triple A only goes to prove how ill they serve us.

It might be more interesting if it were Cornwall that had been downgraded, which is one of the few UK counties to have a credit rating (as a result of some pernicious LOBOS loans taken out before its creation as a unitary council) and of course, a currency user not a currency issuer. But they are not referring to a currency user but a sovereign government which issues debt in its own individual currency.

So what does the downgrading by Moody’s mean?

Simply that they feel (unsurprisingly) that circumstances are getting more difficult for British citizens.

But precisely nothing on repayment of UK government debt, which they are rating. To suggest otherwise is a fantastical credit rating agency delusion of grandeur.

Moody’s is, like other credit rating agencies, owned by some of the banks it advises.

So these banks are encouraged in similar fantasies. They are presumed incapable of realising that sovereign debt never, ever has to result in a default. So one must imagine that these geniuses think that the UK is now just a tiniest shade more likely (from AA1 to AA2), voluntarily, to default on a bond which it has issued in its own currency and which it creates and controls.
Sounds mad?

It is.

The lunatics have not only taken over their own asylum and some in the banks they advise, they have taken over the media as well. So worthy sounding economists are interviewed who say that these ratings agencies are slightly less important than they used to be because they got the US subprime mortgages so wrong (all rated triple A, lest we forget). And of course because of QE and the economic slowdown there isn’t an awful lot of debt around now.

The media then implies that whilst we still have to watch it, we can all breathe a small sigh of relief on behalf of our future governments.

The audience are thus duped into believing the way the world doesn’t work.

It is high time that ratings downgrades for sovereign currency issuing nations provoked journalists to ask whether, perhaps, the sovereign currency was issued in Cloud Cuckoo Land.


  1. David Malpas -

    Not really understanding this comment. Whatever your view on the value of Moody’s opinion (possibly not much) you seem to be implying that a sovereign cannot or will not default on its domestic debt (i.e issued in their own currency). However, this view is simply not empirically supported. Since 1980, around 50% of sovereign debt defaults have included domestic debt. The obvious examples are Russia in 1998 when they defaulted on their local debt but only had a moratorium on their external debt. Also Argentina which defaulted on both external and local debt in 1982 and 2001 but just the local debt in 1989. There are obvious reasons why countries will sometimes decide that the cost of defaulting on local debt is lower than defaulting on external debt.

    Of course, it can be argued that most examples are local debt default are just “emerging markets” and such a risk cannot happen to the UK. However, Moody’s is rating Gilt debt out to 50 years and empires have fallen in less time than that! So to assign a small but non-zero probability to default on local hardly seems unreasonable.

    1. Daniel -

      Russia defaulted in 1998 due to the Government’s desire to maintain a peg to the US Dollar. Argentina defaulted due to a Dollar peg also.

      Which currency is Sterling pegged to that could place the UK in a position of seeking to default on it’s domestic or foreign debt?

      1. Peter May -

        Thanks for that.

  2. Peter May -

    I’m aware that there are a very few sovereign currencies that have defaulted on their own sovereign debt and in all cases I would suggest they were either ill advised or didn’t understand what they were doing – probably both.
    My point is that the possibility of a UK default has gone down by one notch – the idea that Moody’s or anyone else can forecast that the UK is just ever so slightly more likely, voluntarily, to default on its own debt is for the birds. They cannot possibly measure it. In short they have no idea. It is true that state breakdown or a nuclear attack would not be good for repayment, but then they have no idea on that either.
    (Much more likely they wanted to bring themselves into line with the same classification as their competitors.)
    Bonds will always be repaid by any sane government just because they can be.
    The consequences of not doing so, when you can, are just making life for your country and countrymen purposely and needlessly more difficult.
    That’s also why I wish the media would tell it as it really is – so there is no doubt.

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