Saturday, August 13, 2011

S&P Downgrade Nuances

Credit to someone else for this argument - I don't remember who, sorry!

Many people have been flipping about the S&P downgrade. This is understandable. It's a big deal. Many people have been arguing about whether it's justified, and from that perspective, it's far more complicated.

S&Ps ratings, to my knowledge, measure only the probability of a default event. Unlike some other ratings agencies, they do not consider severity, duration, recoverability, or anything else - only probability of a default event. From that perspective, given the drama that just went on (which is attributable to both sides, this was bipartisan stupidity), how can we be considered AAA when we were days away from default and it could happen again?

We probably don't deserve AAA anyway if inflation risk is accounted for along with severity, etc, but that's more debatable

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