One Bad Move Away From Junk. Outlook Negative.

later12

Ireland sovereign paper was this morning downgraded to Moody's rock bottom investment grade, with an outlook for further negative downgrade. In other words, what is referred to as 'junk'.

http://www.reuters.com/article/2011/04/15/markets-bonds-euro-idUSLDE73E0RM20110415

What does junk mean? Well actually, on the fact of it, it means very little. Investors, or rather certain types of investors, do still buy junk bonds, despite their non-investment grade; there is a market for them. They are now 'speculative' bonds although arguably, Irish sovereigns have been quite speculative for some time.

What is more interesting, is mainstream market response.

This is the table from this mid day
Name|Level|Change|Time
Ireland|558|13 (+2.3%)|1200
Greece|1112|21 (+2%)|1200
Portugal|601|11 (+1.9%)|1200
Spain|233|5 (+2.2%)|1200


This shows that it is still cheaper to insure Irish debt against default than Portuguese debt, a position we finally achieved this this week, but which may had more to do with the fact that Portugal requested a an international bailout than anything positive we did ourselves.
Nevertheless, Irish CDS led the race to the bottom in CDS terms this morning. This means that it now costs €558,000 to insure Irish debt of €10m. On the other hand, the same Italian debt costs 'only' €143,000 to insure against default, and even some investors will be looking at that with trepidation this morning.

Irish bond values fell immediately by around 0.9% on opening this morning, and spreads between ours and other peripherals and Bunds have also been widening during the day.

Quite unfortunate that this is all happening on the same day as Ireland publishes its new MoU for the bailout.

beeftotheheels

My Dad asked why Moody's downgraded us when Fitchs didn't yesterday, and what that means.

Since this is your area maybe you could explain a little more about the different ratings agencies since this is bound to confuse people?

later12

I think your Dad's guess is as good as anyone else's, because all we have to go on are rather vague statements of reasoning by the different ratings agencies - and remember - it is only relatively recently that agencies have even had to provide these reasonings, and they rarely if ever supply more than a paragraph in detail.

Basically for anyone who is interested, there are three ratings agencies that matter in life: (i) Standards and Poors, (ii) Moody's, and (iii) Fitch. Their job is simply to put a value on the investment worthiness of a security (e.g. government debt (bonds), corporate bonds) or on corporations themselves.

A rating and the attached opinion is derived from an emprical models (which are called predetermined standardised risk weightings). These weightings vary from agency to agency. This leads to fluctuations between what different ratings agencies suggest is the investment worthiness of a specific security, or its probability of default (PD). Another factor which gives rise to variable ratings between agencies is the extent to which non-quantitative assessments are taken into account.

For example, this is the reasoning behind Moody's rating for Irish debt, issued this morning:

The key drivers for today’s rating action are:
1. the expected decline in the Irish government’s financial strength combined with the country’s weaker economic growth prospects; and
2. the uncertainty created by the solvency test required by the European Stabilization Mechanism (ESM) for the provision of future liquidity support.

Now point 1 will have been measured largely quantitatively, but how can we accurately measure point 2 - a doubt - and its impact upon investment potential or probability of default? I think (and it is a guess) that point 2 is the reason for the disunity between the two agencies in question. Fitch (it appears in light of the fact that they just haven't mentioned it) may not judge this to be a big issue right now.

In the case of the above beeftotheheel's Dad is struggling with the same question as we all are, and that is why the agencies are differing in their assessments. We can only, unfortunately, engage in slightly educated guesswork and in the environment in which the state currently finds itself, that is anything but helpful.