\\ As far as I know, there's no financial-markets law saying that if some countries get a credit-rating downgrade, then others must get a credit-rating upgrade to keep the system in balance.
But right now it seems to be working that way.
The past year has brought credit-rating downgrades to Portugal, Spain, Ireland and Greece, and credit-watch warnings to the United Kingdom and Mexico.
And it has brought credit-rating upgrades to Brazil, Peru, Turkey and Indonesia, and credit-outlook improvements to Russia and India. \\
Author : James Jubak
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So what is going on with these crazy credit ratings?
I have a couple of general theories knocking around in markets at the moment.
Firstly most fundamental valuations including credit are relative and secondly I believe and talk about it often, first world demise is in full play.
Where the action is at in my opinion is in local markets and BRIC, especially as the governments from the first world overreact to a crisis that should be behind us now. The first world is lifting taxes to exorbitant levels to fund their deficits, collapsed interest rates to flood the markets with liquidity and are in the process to over regulate the banks with enough new policy to build a Tower of Bable in mandates.
So what is going on - relative valuation principle:
A is graded at 10
B is graded at 12
C is graded at 3
Total possible investment capital in a horizon is stationary, if the grading on A and B falls to say 6 and 7 respectively the relative grading on C goes up when compared to the other assets, that is the spread narrows. As the relative rating on C rises, the hurdle rate or interrelated beta factor of WACC which translates to the effective interest rate slides and the volatility of the assets net value is dampened. It`s a story of the world and one of the systems that drives the rich get richer while the poor can never escape their interest constrained domain but that is all changing at a sovereign level. To put it another way, those that are risk adverse and price in such positions can actually drive the dysfunction.
So what is going on- Demise of the first world:
Let`s just quote the article here: ``At the start of the decade, Peru's national debt equaled 50% of the country's gross domestic product. It now stands at just 25%. (The United States is on track to finish fiscal 2011, ending Sept. 30, 2011, with a debt equal to 98% of GDP, according to the International Monetary Fund.``
Again in fundamental valuation if the value of an asset used to secure a loan is less than the outstanding balance on the loan you have negative equity. America is 2 percentage points off a strict measure of bankruptcy. The reason why Moodys, Fitch and S&P won`t down grade the country is elusive but perhaps such an action would impact their own business because they are headquartered in this nation or may be they probably don`t want to take flack from their biggest market - I would say nepotism probably lives on.
