Uk aaa?

macaque_2

There has been much talk about interest rates staying at 0.5% for years. This assumes of course that the MPC are still calling the shots. In the end however, its the markets that decide, not the government. This would certainly put the cat amongst the pidgeons.

Yet if we do chuckle at the French, and the whole continent’s faulty currency, there should be a hint of fear in our laughter, as Britain’s membership of the shrinking triple-A club is by no means assured.

http://www.citywire.co.uk/money/week-ahead-a-fresh-threat-to-uk-membership-of-aaa-club/a559996?re=17518&ea=174368&utm_source=BulkEmail_Money_Weekly&utm_medium=BulkEmail_Money_Weekly&utm_campaign=BulkEmail_Money_Weekly

RenovationMan

There is a difference between fiscal and monetary policies.

ILW

If a countries credit rating is reduced and thereby the cost of borrowing increases, would this have any direct effect on retail rates?

wellused

It would have an effect on taxation and government spending, therefore effecting employment and public spending.

Pimperne1

wellused wrote: »

It would have an effect on taxation and government spending, therefore effecting employment and public spending.

Oh dear. No wonder the French are angry.

homelessskilledworker

macaque wrote: »

There has been much talk about interest rates staying at 0.5% for years. This assumes of course that the MPC are still calling the shots. In the end however, its the markets that decide, not the government. This would certainly put the cat amongst the pidgeons.


http://www.citywire.co.uk/money/week-ahead-a-fresh-threat-to-uk-membership-of-aaa-club/a559996?re=17518&ea=174368&utm_source=BulkEmail_Money_Weekly&utm_medium=BulkEmail_Money_Weekly&utm_campaign=BulkEmail_Money_Weekly

It is not possible to put interest rates up now without causing a bloodbath, 2015 at the earliest, and then by very little.

tomterm8

ILW wrote: »

If a countries credit rating is reduced and thereby the cost of borrowing increases, would this have any direct effect on retail rates?

Your question assumes that a countries credit rating has an impact on the cost of borrowing.

With a company or individual this is the case.

With a sovereign nation*, capable of printing its own currency, this is not the case. Such a nation can print as much money as it likes, lend the money to its banks, who would then be obliged to lend the money at an interest rate that the government sets.

Think this can't happen? Since 2008, UK gilts have consistently been below inflation. Everyone who has lent money to the government has done so at a loss.

It is already happening.

* Eurozone nations are not sovereign nations. This explains why Japan has been running along quite happily with 200% debt to gdp for the last decade, whereas eurozone countries are in crises with much smaller debts.

Generali

macaque wrote: »

There has been much talk about interest rates staying at 0.5% for years. This assumes of course that the MPC are still calling the shots. In the end however, its the markets that decide, not the government. This would certainly put the cat amongst the pidgeons.


http://www.citywire.co.uk/money/week-ahead-a-fresh-threat-to-uk-membership-of-aaa-club/a559996?re=17518&ea=174368&utm_source=BulkEmail_Money_Weekly&utm_medium=BulkEmail_Money_Weekly&utm_campaign=BulkEmail_Money_Weekly

I've been banging on about this for ages and few people seem to believe me but the obvious (and possible only) way out of the problem is more financial repression. That is that you force people to buy bonds that may not want to do so.

This is already being done through the pensions system as you are forced to buy an annuity and your annuity provider is forced to invest in bonds. It would be possible to, for example, force banks to buy more bonds by increasing the reserve requirement (the owners of banks pay the price of this, that is to say the shareholders being you via your pension fund and nationalization). Anyone heard if banks are being required to increase reserves anywhere?

My guess is that the next step will be forcing people to invest a proportion of their pension into bonds.

The UK can simply print money to repay the debt. IIRC however, the debt agencies take financial repression through inflation into account when rating countries and ultimately of you systemically attempt to 'inflate away the debt' lenders will force you to borrow in USD or EUR.

EchoLocation

What would be the actual effect of a downgrade from AAA to AA+ ?

It seems like such an absurd miniscule and irrelevant change. Does it have a real quantifiable difference or is it the financial equivalent of just publicly raising an eyebrow to someone?

RenovationMan

Generali wrote: »

This is already being done through the pensions system as you are forced to buy an annuity and your annuity provider is forced to invest in bonds.

You're a bit out of date gen, people have been allowed to use Drawdown instead of buying annuities for a number of years and recently the rules on drawdown have been modified (or are about to be) to remove the upper age limit.

michaels

Two answers:
The first is that some investors have rules that they can only invest in triple a rated bonds so they have to sell any holdings and obviously can't buy anymore - less buyers and more sellers = falling prices and thus higher yields.
The second is that the price of sovereign debt does not depend on the credit rating as if a rating was expeced to be cut everyone would try and sell before hand which would drive the price down to a level at which any cut in rating would not result in bondholders suffering a loss. Thus only unexpected downgrades would alter prices. This is probably more realistic, different 'triple As' trde at different yields and prices change with changes in expectations rather than with downgrades.
Don't forget ratings are only someone's opinion of how likely a bond is to default, everyone can have their own opinion havingdone their own research and thus make their own investment decisions resulting in a market setting a price, a rating as a second hand opinion should probably have less impact on prices than physical facts such as psbr announcements.