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You have far too much faith in the credit default swap market. The CDS market is just as broken as the rating agencies.

But anyway, you're asking the tail to wag the dog. If both the credit rating system and the credit default swap market functioned as advertised, the credit default swap market should be following the credit ratings, not the other way around.

Another point here is that even if both the rating agencies and the CDS markets functioned as advertised, the participants may well have differing political analyses. If the ratings agencies believe that the Greek sovereign debt is covered by an implicit guarantee from Germany, this will be reflected in the ratings. If the price-setting players on the CDS market do not believe this, then their bid and ask prices will reflect their different assumptions about the probability of a bailout.

Of course, this entire discussion is somewhat akin to arguing about the number of angels than can fit on a pinhead, since both the credit rating agencies and the credit default swap markets are obviously broken and being gamed rather blatantly.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 26th, 2010 at 07:39:31 PM EST
[ Parent ]
In your view credit rating is "the dog" and market is "the tail"?

I ask the dog (market) to wag the tail (credit rating) not other way round.

As for Greece - beliefs that some nice aunty will back your cooked books full of debts is irrational to say the least.

If they play fairly than many developing nations's credit ratings should be in the junk category.

Yet, even after IMF bailouts they still enjoy A ratings from rating agencies.

So can be only one solution - dump the rating agencies for all purposes.

And, one more thing - I did not ask to "upgrade the debt" of developing nations as you said before. I asked for fair play and reflection of market conditions, not irrational "beliefs".

by FarEasterner on Mon Apr 26th, 2010 at 08:05:03 PM EST
[ Parent ]
sorry, read "developed" instead of "developing"
by FarEasterner on Mon Apr 26th, 2010 at 08:06:09 PM EST
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FarEasterner:
As for Greece - beliefs that some nice aunty will back your cooked books full of debts is irrational to say the least.

Possibly. But it seems to be SOP for the bankers.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Apr 26th, 2010 at 08:11:05 PM EST
[ Parent ]
First, Greece's credit rating is low Bs last I saw.

Second, the bankers I thought were fighting against transparency in the credit default swap market. They want to keep the deals private. So, how would anyone know what's out there?

Third, Greece had 100% debt to GDP for the last decade. Nothing changed. So, what was cooking in those Greek books, I wonder?  Seems to me they've had the same level of debt, and the only change is that the market is now illiquid and risk averse (i.e. no one is lending to Greece).

I want to get to the bottom of this cooked book idea because it hides a lot of things.

by Upstate NY on Mon Apr 26th, 2010 at 10:14:13 PM EST
[ Parent ]
las time I heard last week S&P's lowered Greek credit rating from double A to single A.
by FarEasterner on Tue Apr 27th, 2010 at 05:31:47 AM EST
[ Parent ]
In your view credit rating is "the dog" and market is "the tail"?

No, in my view the CDS market is a scam, and the credit rating agencies are in the business of advertisement, not analysis.

But if things worked as advertised, the rating agencies would be the dog and the CDS market would be the tail: The rating agencies should have more information than the market participants (that's the only economic justification for having rating agencies in the first place), so the market should take note of their opinions, not the other way around. If the rating agencies just slavishly follow the CDS market, then you might as well abolish the rating agencies and just use the market spread for credit default swaps instead.

As for Greece - beliefs that some nice aunty will back your cooked books full of debts is irrational to say the least.

Not when the nice aunty in question is in a currency union with you.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 26th, 2010 at 11:17:19 PM EST
[ Parent ]
everybody can use CDS data right now. And rating agencies have the right to publish their assesments.

However your defense of their irrational grading policy sounds unconvincing.

Their ratings is pure scam and unlike manipulations on CDS market their questionable rates stand exposed.

by FarEasterner on Tue Apr 27th, 2010 at 05:39:16 AM EST
[ Parent ]
There is no regulated CDS market, it's all over the counter and dominated by about 5 issuers of CDS. CDS market players have resisted tooth and nail any suggestion of central clearinghouses for CDS, or any of a number of more intrusive regulatory suggestions such as requiring the delivery of a defaulted bond in order to collect the value of a CDS.

CDS issuers have been shown repeatedly to be inadequately capitalised to face an actual default on the underlying, which smells of a scam where CDS premiums are collected with no intention of paying up.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Tue Apr 27th, 2010 at 05:56:57 AM EST
[ Parent ]
everybody can use CDS data right now.

Even if that were true, which as Mig points out below it isn't, capital market prices are completely worthless for estimating things about the real economy.

And rating agencies have the right to publish their assesments.

But they won't, because that would demonstrate to all the world that their ratings are advertising campaigns rather than serious analysis.

However your defense of their irrational grading policy sounds unconvincing.

I'm not defending it. I'm saying that bad as the ratings agencies undoubtedly are, the capital markets are even worse. So you can't use data from the capital markets to indict the rating agencies.

What you can use to indict the rating agencies is the fact that they've been wrong on any issue of any real importance that they have commented on. That is an indictment that matters.

The failure of their assessments to correlate with the whims of the capital markets is worth only a shrug, since the whims of the capital markets say nothing at all about the real economics of the activity they are supposed to reflect.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 27th, 2010 at 10:03:04 AM EST
[ Parent ]
I asked for fair play and reflection of market conditions, not irrational "beliefs".

You have an irrational belief in market prices.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Tue Apr 27th, 2010 at 01:57:10 AM EST
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another defender of S&P's, Moody's and Fitch?

welcome to the fiercely competitive field of uncovincing defenders of their rating scams.

by FarEasterner on Tue Apr 27th, 2010 at 05:41:31 AM EST
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Have you read the rest of my comments where I advocate that regulators strip the rating agencies of their role in determining credit ratings of bank holdings for regulatory capital purposes?

Market prices are known not to be predictors of anything - they tell you how much it costs you to hedge particular exposures as of right now, and in small volumes. They don't tell you what the probability of anything is. In particular, CDS spreads are not probabilities of default.

The probabilities of default quoted as equivalent to various credit ratings are also nonsense, as I have said before on this forum.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Tue Apr 27th, 2010 at 05:52:46 AM EST
[ Parent ]

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