Good morning

The headlines:

  1. The UK drops a credit rating.

    Link: political calamity.

    Moody’s downgraded the UK from the golden credit rating (from Aaa to Aa1) over the weekend. With all the usual stories about “weak outlook” and “fiscal consolidation challenges”. And all the usual reactions: “We don’t expect much market impact from the downgrade, it was widely expected.”

    Which basically implies that Moody’s has done nothing of worth at all. Except highlight to a susceptible public that their government ought to be doing something – although that something better not impact their pockets or lifestyles, except to make the former deeper and the other more awesome.

    But the politics aside, I have been wondering what Moody’s is trying to tell the investing world. Is their rating meant to be a measure of the likelihood of default? In which case, there are better and more timeous measures (credit-default spreads). And besides, the Central Bank could always just print the pounds to pay the debt in a crisis.

    Or is it meant to be a measure of the likelihood that a government will be forced to print money to pay the debt? In which case – the rating would need to apply to any and all bond instruments denominated in sterling, as the devaluation would affect them all. And actually, now that I think about it, the spread between fixed bonds and index-linked bonds would also be a better measure.

    Dear Moody’s. Thoughts?

  2. The Italians are voting.

    Link: Literal comedy.

    I’m not sure how I missed this: but Berlusconi’s running mate, Beppe Grillo, is a stand-up comedian.

    I feel like that says it all.

    Elections end today. Europe is a bit on edge.

That’s all for now.

Have a good day.