Oct 23, 2008

Credit ratings and geopolitics

so, i am bit confused here. S&P downgrades Russia's sovereign credit rating outlook to 'negative' today. because they committed some 15% of GDP to bailout the financial system and are heavily intervening in the forex market, which dwindled down the reserves by 15 bill just in a week. S&P is worried about the impact on the government balance sheets as confidence in the financial system and monetary regime declines.

so these are all big numbers, I agree. but at the same time, Russia's public external debt is a puny 2-3% of GDP, its forex reserves are 30% of GDP, oil funds another 14%, government budget and CA are all in surplus. so I am not reeeeally worried about its ability to pay back its debts. What is more, Russia is actually lending to other countries, like Iceland and Belarus.

I wouldn't care about S&P ratings, but the potential downgrade raises the costs of insuring the debt against default, with the debt now classified as distressed. Now, if you look at the US, with all its troubles and deficits, the credit ratings is an AAA (stable) against Russia's BBB+ (negative).

is it just me or there is something wrong with the picture?

8 comments:

Dany said...

what about Argentina?

Pierre-Louis said...

alright I might appear like a complete ignorant here but does S&P include poltical risk in the ratings? I mean not just the econonic fundamnetals you mentionned? Isn't the russian governbment accountabel to no one, like he can decide to do anything at any point?

Sebastian said...

as recently discussed with Pascal, the future path of oil and gas prices will certainly play its role in the whole thing. Since the budget (still) surplus soon to be deficit is entirely dependent on the oil price as is the trade surplus. with huge swings in the stock market (with a recent drop of 40% though receovering later on), a shaky situation in Georgia, fear about the stability of the banking system and an exchange rate which is supposed to be stable towards the Euro and the Dollar you may wonder how much more political will remains to keep the system running this way if pressure on the financial market increases and reserves are needed to keep up the exchange rate while oil prices fall below the level at which the budget is calculated.
I guess the point is simply that investors have a higher self interest in exiting Russia and causing trouble there than exiting the US. In particulat I think of all those central banks that hold treasury bills and fear a depreciation of the Dollar from massive exit of the US market.
However, surely part of the story will be default history which always enters these ratings and the political risk dummy which is varied at will...

cosimo said...

Yeah that's it. The Russian gov't is not accountable, while the US gov't responds to the interests of the top 0.1% of the income distribution.

Sebastian said...

nice one cosimo

Pierre-Louis said...

S&P is american...you can choose a russian rating is you prefer

Katya said...

mmm. you are always supposed to explain your rating. if they put political risks or oil prices, i wouldn't complain, although i would argue Russia is robust until oil prices hit $50. but the impact of banking system on the budget and hence inability to repay the non-existent debt? please.

btw, the stock mkt in russia is almost entirely foreigner run. but now that it is so cheap, i hear the locals are buying in...

Cam said...

Given that S&P's recent performance in rating mortgage backed securities was slightly suboptimal, I wouldn't put much store in what these guys have to say about anything, really, even in terms of sovereign credit ratings..........