S&P’s Chambers: Work To Do In The EU

January 25, 2012

What’s so bad about a sovereign credit rating downgrade anyway?


After presiding over the historic downgrade of the United States last summer, John Chambers, and the Standard & Poor’s Sovereign Rating Committee he heads, completed a review of the eurozone’s countries on Jan. 13. The verdict: All is not well.

Despite all the summits and European Central Bank bond purchases, S&P downgraded nine eurozone countries, including France, saying they haven’t done enough to address their debt problems.

Moreover, since IndexUniverse.com Correspondent Alex Ulam sat down in Chambers’ office in lower Manhattan for a chat, S&P downgraded Credit Agricole and Societe Generale—two huge French banks on the hook for a lot of bad debt issued by Greece.

Chambers explained the reasoning behind the downgrades and he speculated about what the future may hold.

Ulam: Both the U.S. and France are rated “AA+” now. So what is the difference in impact?

Chambers: The difference between an “AAA” and an “AA+” is a fairly small incremental increase in credit risk.

But when the rating was lowered in the U.S., a lot of people realized that it wasn’t going to be possible to have endless stimulus packages from now until the end of time. That made people re-evaluate some of their valuations on stocks.

When people pulled their money out of stocks, the money had to go somewhere. It could have gone outside the U.S., but it stayed within the U.S. and it went into the government bond markets. The lesson of that is, when you're at the top end of the credit rating scale, liquidity trumps credit risk.

Ulam: So is it going to be much more expensive for France to borrow money?

Chambers: Well, it already has become more expensive. They trade wide to Germany. So in a sense, those higher real interest rates are already a reality.

Ulam: But do you think that your rating downgrade will make it that much more difficult for them?

Chambers: No. We think our ratings give investors a timely view on default risk. We think that they're best served when we give regular opinions that are measured. And we’ve got 21 ratings between “AAA” and “D.” So, if you go from the highest rating to the next-highest rating, you’ve got to see that in the context of 21 ratings.

So we’ve kind of gone from indigo to navy blue. You know, nobody likes to be downgraded. But the French finance minister Baroin said that “AA+” is still a very high rating. And it is a very high rating. It indicates very low credit risk. It’s just not the highest rating anymore.

Ulam: In July, you downgraded Greece to “CC” in anticipation of the risk of a default. Has the risk for Greece risen since then?

Chambers: Well, “CC” is the lowest you can go. So, if you get anything lower, you're in default.

But the risk has risen. The imminent event has become even closer. They’ve got a very large bond payment in the middle of March that they need to make. With us, you go to selective default if you miss a payment. But you also go if you have a distressed exchange. And so it’s possible that they could have a “voluntary exchange” that we would characterize as a distressed exchange. And that would take them down to selective default.



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