6 january 2010, is our AAA rating at risk ?

Wednesday 6th January 2010

In both the us and Europe, the turmoil has separated the weaker banks from the strong. Will the same now happen for countries ? Iceland of course has already gone, but the thing to watch over the next months is how the bond markets react to countries’ debts and their plans to deal with them. Greece’s bond market spread widened drastically recently, meaning in plain English that the cost to the country of borrowing huge amounts shot up. By contrast Ireland, another of the piigs (the euro’s weakest economies, also portugal, italy and spain) put in eye watering plans to spend less, and its spread is rather more moderate. What hasn’t happened though is a sharp deterioration of these countries’ currencies, although the euro has, perhaps for the first time, been affected. The uk of course has no such protection if that’s where the markets’ fire turns. Will it ? Fitch already warned the uk about its debt, meaning the prized (and cheap to borrow with) AAA status is an issue. According to the pbr, uk debt will reach 90% in 2011, higher than japan’s when it lost its AAA – and that’s the official forecast. It is rising now by billions a week. A sign of deep worry (and by the by the markets' continued ability to innovate) is the invention of sovereign credit derivatives – basically counterparty insurance against a country going bust. That is wise. Though default is unlikely, the sort of crash seen corporately at weaker banks may well be played out in weaker nations in 2010, and the uk is unfortunately high on that list.