So S&P has downgraded Brazil’s rating on long-term foreign currency debt to junk and lowered its long-term local currency sovereign credit rating to ‘BBB-‘ from ‘BBB+’. What does this tell us? To begin with, credit rating agencies have repeatedly been wrong.
The same agencies that rated Enron investment grade just weeks before it went bust, the same people that assigned triple A rating to toxic subprime mortgage-backed securities are now downgrading Brazil sovereign debt. As the FCIC report pointed out “The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval.” (FCIC 2011)
After all, should you take the credit rating agencies seriously? The answer is no. Brazil is a net external creditor, that is, though the federal government has debt denominated in foreign currency, it holds more foreign currency assets (figure 1) than it owes in foreign currency debt (figure 2). Brazil’s public sector can pay all of its long-term financial obligations denominated in foreign currency. Moreover, Brazil’s federal government can never become insolvent on obligations denominated on its own currency (note that since 1999 Brazil maintains a floating exchange rate regime, which increases domestic policy space).....New Economic Perspectives
Credit Rating Agencies and Brazil: Why The S&P’s Rating About Brazil Sovereign Debt Is Nonsense
Felipe Rezende | Assistant Professor of Economics, Hobart and William Smith Colleges
http://www.theatlantic.com/international/archive/2015/09/hitler-holocaust-antisemitism-timothy-snyder/404260/
ReplyDeleteHitler was an anarchist.
Promote to post please.
"we have detected the USA worshiping fanboy second rate foreign nation of Brazil issuing securities denominated in our USDs... we begin bombing in 5 minutes..."
ReplyDeleteThis part:
"Moreover, the Brazilian Central Bank (BCB) is ready to implement programs that will use its US$363 billion of foreign reserves to smooth exchange rate volatility and support foreign currency liquidity."
This is what I keep trying to say here, the financiers of the trade have to make regulatory adjustments to their balance sheets in response to changes in the prices of the traded and financed items...
So if you want to know which way a currency exchange rate is going to go, ie if you want to front run the forex, you have to follow the observed prices of the financed goods that are traded between the nations FIRST.... the prices of the goods move FIRST..... THEN the financiers (member banks and even sometimes the CBs depending on the situation...) have to make the regulatory adjustments which will have the effect on the observed exchange rates....
rsp,
It's the height if absurdity having a sovereign issuer of currency running its macro policies in accordance with the austerity wishes of rating agencies when said country is a net creditor in dollars
ReplyDeleteAnd the best model available to predict exchange rates is the one stating that tommorow's rate will be equal to today's plus or minus a random error. No one has yet devised a better econometric model than this one in the domain of exchange rate movements.
Right Jose the system isn't regulated... ?????
ReplyDeleteAll of the people trying to model this think "we're out of money!" so of course you are not going to see very good models developed...
And the solution for the Brazil situation not to ignore the moron agencies, it is for the US to elect competent leadership who would ban the issuance of any form of USD liabilities by any foreign entity...