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That's not really how it works either. Bondholders usually trust the ratings agencies (this trust is often mandated by law for pension funds, etc.) which have o

That's not really how it works either. Bondholders usually trust the ratings agencies (this trust is often mandated by law for pension funds, etc.) which have often basically lied about ratings because they were paid by the issuer. When challenged on this they usually claim the first amendment (i.e. license to lie), although S&P went a step further and downgraded the US in a fit of rage when the SEC started investigating them for ratings fraud in 2011. Ironically interest rates on US treasuries went slightly down afterwards.

Arnt 10y ago
Almost. Various parties are required to trust that anything rated D or whatever is risky. They aren't required to trust that AAAAAA+ means risk-free.
- malloryerik 10y ago
  Excuse me for stating the obvious. Nothing is risk free. Indeed even cash is not risk free.
  - Arnt 10y ago
    Right, and nothing on the planet is black, because there always some minor light reflection. In real life, this sort of sophistry only makes terms like "risk-free" and "black" useless.
howlin 10y ago
> although S&P went a step further and downgraded the US in a fit of rage when the SEC started investigating them for ratings fraud in 2011. At the time, the US government was actively considering whether to default on US Treasuries. The downgrade wasn't some petty revenge.
- crdoconnor 10y ago
  At no point even during the height of Republicans' "government shutdown" was the US government ever actively planning on defaulting on US treasuries. Their rationale was, in any case, that "entitlements spending" was too high: https://www.theguardian.com/business/2011/aug/06/sandp-debt-rating-downgrade-statement?CMP=twt_fd https://www.theguardian.com/business/2011/aug/06/sandp-debt-... The entire rest of the market (and the other ratings agencies) were just about able to determine that if you have the keys to the cash printer you're actually not in danger of running out of cash and political bickering doesn't translate into risk of political suicide.
  - howlin 10y ago
    The white house and congress was deadlocked, the government was shut down, and the treasury was not legally authorized to borrow more to make payments. There was talk of a trillion dollar coin to side step the national debt cap. This was a really big deal, and people were scared the maneuvering wasn't going to work in time. It totally justifies a small credit rating downgrade.
    - crdoconnor 10y ago
      It was pure political theater. Any attempt to actually trigger default would have been political suicide for whomever tried it. When actual credit events look likely it triggers a sharp rise in interest rates. It looks like this: https://4.bp.blogspot.com/-9UVV9J6AdU0/TzxG9W26TsI/AAAAAAAACl0/OCstp2_GTpA/s1600/Screen+shot+2012-02-15+at+7.59.06+PM.png https://4.bp.blogspot.com/-9UVV9J6AdU0/TzxG9W26TsI/AAAAAAAAC... That did not happen. Nothing happened. Not even a blip. The market (correctly) assessed this as being the usual partisan political bickering.
      - countingteeth 10y ago
        Oh come on. This is partisan hackery. This "theatre" did in fact cause vital government functions to shut down. I was personally on a project where I had to stop work because our checks were sitting on a table in Washington and a major milestone meeting was canceled because the government was furloughed and would not be there, throwing the entire project schedule off. This was replicated thousands of times across the economy. Even the ghost of a chance of going down to the wire as to whether a bond payment would be missed by a single day on US obligations, is in itself tremendously disruptive. The economy is structured around U.S. debt as being the safest paper there is. Don't downplay just how dangerous dicking around with this for partisan points was.

Arnt 10y ago

Almost. Various parties are required to trust that anything rated D or whatever is risky. They aren't required to trust that AAAAAA+ means risk-free.

malloryerik 10y ago
Excuse me for stating the obvious. Nothing is risk free. Indeed even cash is not risk free.
- Arnt 10y ago
  Right, and nothing on the planet is black, because there always some minor light reflection. In real life, this sort of sophistry only makes terms like "risk-free" and "black" useless.

howlin 10y ago

> although S&P went a step further and downgraded the US in a fit of rage when the SEC started investigating them for ratings fraud in 2011. At the time, the US government was actively considering whether to default on US Treasuries. The downgrade wasn't some petty revenge.

crdoconnor 10y ago
At no point even during the height of Republicans' "government shutdown" was the US government ever actively planning on defaulting on US treasuries. Their rationale was, in any case, that "entitlements spending" was too high: https://www.theguardian.com/business/2011/aug/06/sandp-debt-rating-downgrade-statement?CMP=twt_fd https://www.theguardian.com/business/2011/aug/06/sandp-debt-... The entire rest of the market (and the other ratings agencies) were just about able to determine that if you have the keys to the cash printer you're actually not in danger of running out of cash and political bickering doesn't translate into risk of political suicide.
- howlin 10y ago
  The white house and congress was deadlocked, the government was shut down, and the treasury was not legally authorized to borrow more to make payments. There was talk of a trillion dollar coin to side step the national debt cap. This was a really big deal, and people were scared the maneuvering wasn't going to work in time. It totally justifies a small credit rating downgrade.
  - crdoconnor 10y ago
    It was pure political theater. Any attempt to actually trigger default would have been political suicide for whomever tried it. When actual credit events look likely it triggers a sharp rise in interest rates. It looks like this: https://4.bp.blogspot.com/-9UVV9J6AdU0/TzxG9W26TsI/AAAAAAAACl0/OCstp2_GTpA/s1600/Screen+shot+2012-02-15+at+7.59.06+PM.png https://4.bp.blogspot.com/-9UVV9J6AdU0/TzxG9W26TsI/AAAAAAAAC... That did not happen. Nothing happened. Not even a blip. The market (correctly) assessed this as being the usual partisan political bickering.
    - countingteeth 10y ago
      Oh come on. This is partisan hackery. This "theatre" did in fact cause vital government functions to shut down. I was personally on a project where I had to stop work because our checks were sitting on a table in Washington and a major milestone meeting was canceled because the government was furloughed and would not be there, throwing the entire project schedule off. This was replicated thousands of times across the economy. Even the ghost of a chance of going down to the wire as to whether a bond payment would be missed by a single day on US obligations, is in itself tremendously disruptive. The economy is structured around U.S. debt as being the safest paper there is. Don't downplay just how dangerous dicking around with this for partisan points was.