Thursday, August 11, 2011

An Illustration Of The Uselessness Of The Credit Rating Institutes

Which of these two countries best deserve the highest credit rating?

Country number 1, who has a budget deficit of nearly 10% of GDP, a government debt of nearly 100% of GDP, a large current account deficit and 1% growth. Or country number 2 that has a balanced budget, a government debt of 7% (no, the absence of a zero behind the 7 is not a typo) of GDP, a current account surplus and 8% growth.

Most people would probably pick country number 2, but not the credit rating institutes. They give country number 1 (the United States) AAA or AA+ ratings while they give country number 2 (Estonia) AA-, A+ or A1. The way of thinking that gave AAA rating to packages of subprime mortgage backed securities is clearly still alive and well at the credit rating institutes.

Why anyone thinks the opinions of credit rating institutes has any value at all is beyond me.

5 Comments:

Blogger iceberg said...

Country #1 is the largest exporter of war and destruction; what does country #2 have going for it?

6:08 PM  
Blogger Shane Leavy said...

Good point, I have shared this.

4:30 PM  
Blogger Mark Burns said...

I once got rejected for a credit card because I had "too little debt."

6:44 PM  
Blogger j_wings said...

Well, except for a few things that I can think of:
1 - the government of Estonia has changed numerous times over the the past 200 years, each time dissolving the past debts - in essence DEFAULTING. (The only significant default of US debt was the default of the debt of the SOUTHERN states after they lost the US Civil war - not federal US Debt)
2 - Inflation in Estonia in 1994 was over 45%.
both of these illustrate a certain amount of historical risk.
3 - As a amall country, estonia is subject to natural and military disasters in a way the US isnt. A whole city in the US can be largely destroyed (like New Orleans) and it barely makes a hiccup in the economy. If somehting like that happens in estonia, it would be a VERY significant portion of GDP, and the government would have to print money ot take loans to sustain the nation... those loans would be a huge fraction of GDP. The size of the US allows us tospread the risk out better.

12:25 AM  
Blogger stefankarlsson said...

j-wings events several decades or centuries ago are hardly relevant. And in case you didn't know, there are no natural disasters (no earthquakes, no tsunamis, no hurricanes etc.) of the significant kind in the part of the world where Estonia is.

9:27 AM  

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