7 ms·

What I never understood is that many countries like America and EI states have triple A credit ratings despite having trillions of debt that is never going to b

What I never understood is that many countries like America and EI states have triple A credit ratings despite having trillions of debt that is never going to be paid back. Whilst developing countries have much worse ratings on the assumption they can't pay it back. Neither the rich or poor countries are going to pay the debt back yet the system is rigged to allow the richer ones to have AAA/AAB ratings so they can continue taking more money to invest. Am I missing something or is this true?

amriksohata 8y ago
EU states
kchoudhu 8y ago
When was the last time the US or the UK defaulted on their debt? The credit rating system is necessarily bayesian, and EM markets all have their most recent defaults within the models' event horizons.
- tonyedgecombe 8y ago
  The UK defaulted in the thirties although I think there were unusual circumstances and it was a debt to the US government.
  - kchoudhu 8y ago
    Yeah, interallied debt to the US was linked to German reparations which stopped in 1932 (I think?). The US wasn't fussed about it...so I'm not sure it was a default. The other one I can think of was the downgrade of the coupon on WW1 war bonds from 5% to 3.5%. Again, seemingly everyone agreed with this, so there is some debate over whether it was an actual default.
- arcticbull 8y ago
  USA: 1979, 1933, 1861 and 1790. [1] https://www.theglobalist.com/a-brief-history-of-u-s-defaults/ https://www.theglobalist.com/a-brief-history-of-u-s-defaults...
kopo 8y ago
Debt really translates to assets sitting somewhere. If Somalia defaults you might end up owning a couple goats but if US defaults maybe you get an Airfield.
- cm2187 8y ago
  State defaults and restructurings don't quite work like that. If the state won't pay its debt there is not much you can do to enforce it. The real difference is that the US or European countries are borrowing in their own currency and under their own laws (well for euro area countries, sort of). So they will inflate their debt away. EM countries typically borrow in USD and often under foreign law and don't have the option to inflate away. But Greece found itself with effectively a foreign currency debt (EUR which they don't control) and ended up defaulting (well, technically "restructuring" but that's the same).
  - jon_richards 8y ago
    What's really weird is that if the USA started inflating their debt away, the value of their debt would drop and they'd need to start borrowing at a higher rate. As long as the USA willing to increase the size of their debt, that doesn't happen. For this to continue, people need to keep lending the USA money, so that the USA can pay off their old debts. People are willing to lend the USA money as long as they don't think the USA will start inflating their debt away. There isn't really a limit to this. Loans to the USA are stable because people keep loaning to the USA because loans to the USA are stable. The size of the debt doesn't affect that equation.
  - icelancer 8y ago
    > So they will inflate their debt away. You say this, but it doesn't work nearly as easily as you seem to think. You cannot just devalue your currency and pay people off with zero effects. And if that was actually a threat, the US would not have an AAA credit rating.
    - cm2187 8y ago
      Oh I agree, inflation is nasty. This accumulation of debt will end in tears.
elisharobinson 8y ago
Not too far of the mark, But the size of an economy matters more. The United States is the only exception to an otherwise straightforward system of supply and demand the USD is required for most forex transactions which keeps its credit rating propped UP. In all other cases, the size of the economy dictates its credit rating and not always the amount which is owed to its creditors.
tormeh 8y ago
What makes you think the debt is not going to be paid back? These are bonds, they come due are repaid continuously. In any given year, any given western government are repaying bonds (and also selling new ones).
jplayer01 8y ago
It matters what currency the debt is in and to whom it is owed.
- Arnt 8y ago
  In what way? Hedge funds have a long history now, and the core of their business model is (simplifying) to arbitrage such differences. So what's left? Whose currency is irrationally treated? Which lenders make a borrower more/less secure?
icelancer 8y ago
The United States has never missed a coupon payment and it doesn't look like it will for the forseeable future (many, many decades). What would you call that besides the best credit any organization could possibly have?
- cm2187 8y ago
  The US is critically reliant on creditors rolling their debt. At one point the music will stop. They will then likely inflate the debt away rather than miss a payment but this biggest accumulation of peace time debt in history will end in tears somehow.
  - icelancer 8y ago
    There have been multiple pauses of music and it hasn't really done much to the USD. The argument that the music will stop requires there to be a new conductor and financial instrument that can replace the USD and the role that the United States plays in the world economy. The EUR was the closest thing we've had in my lifetime, if you don't count all the ridiculous goldbug rushes we've had in the last five decades - the same people saying the exact same thing you are, who have been perpetually wrong when compared to any other type of financial instrument such as the S&P500 or more recently, VTI. I am no fan of carrying enormous amounts of debt. I critically disagree with the United States economic and fiscal policies of the last twenty years, including most quantitative easing initiatives. But if you think the AAA credit rating is somehow fake or corrupt, no metric-driven analysis that even remotely resembles fairness would agree with you. Only theories like "the music will stop" do.
    - suff 8y ago
      The phrase, "cleanest shirt in the laundry basket" comes to mind. Relatively speaking, the US is in a much better place than others, even if it isn't perfect.
      - Tsubasachan 8y ago
        There are countries in the EU who manage budget surpluses. Its why the EU can bail out Greece and soon Italy. Its not impossible.
raverbashing 8y ago
In one sense yes, it's a bit unfair (see the 2008 fiasco with the CDSes) In another, they don't care that a country's debt go to zero, they care that the titles they have (used to be paper, today it's all electronic - but they have a maturity date, a face value and some pay interest periodically) get paid. If they sold a new coupon to pay that debt they're paying now is not so important (usually) But then again if the US or Japan/China/some big EU player defaults in a big way that suddenly becomes the least of your problems.
- icelancer 8y ago
  > CDWs You mean Credit Default Swaps (CDSes)? [Or perhaps Mortgage Backed Securities?] Outside of the SEC being stupid enough not to regulate these instruments, the government didn't have much to do with over-leveraging of the private sector. Though the government did give everyone who fucked up a fall from grace rather than what they deserved, which is bankruptcy and the other side of capitalism that our system tends to forget exists when it is convenient.
  - rtpg 8y ago
    > Though the government did give everyone who fucked up a fall from grace rather than what they deserved I understand this feeling and also wish that there was some sort of moral reckoning. But I feel like the better end state for society is "everyone has access to the same fall from grace that the rich and powerful have" rather than "_everyone_ gets to experience the crushing, arbitrary justice system that those at the bottom rungs of society experience".
  - raverbashing 8y ago
    Yes, CDSs, sorry
pjc50 8y ago
> is never going to be paid back It will probably never be paid down to zero, but this doesn't matter. The debt is made of individual bonds, which have a duration (usually up to 30 years), and are paid back at the end of that duration. By taking out new bonds. They are valuable because what else are you going to do with your money, when you have a large amount to safeguard?
lordnacho 8y ago
They always pay back any individual loan because they can get a new one to cover the expense. That's what the rating agency is judging, whether they can in one way or another pay back what is due.
gaius 8y ago
never going to be paid back Many investors in government bonds don’t want to be paid back. They just want interest payments forever. So the rating is really just about the confidence that it will happen. I was chatting to a guy from Sybase once who had written some special date-handling code at the request of a customer who was still handling payment streams from the time of Napoleon.
- codeisawesome 8y ago
  Napoléon was first emperor in 1804 - if it was from then, we’re talking 214 year old debt - fascinating!
  - OldHand2018 8y ago
    > Napoléon was first emperor in 1804 - if it was from then, we’re talking 214 year old debt - fascinating! The UK issued perpetual bonds starting in 1751. They were called Consol Bonds, but they were all redeemed in 2015. The US has historically issued Consol bonds with the right of redemption. The last mention of Consol bonds I can find is the June 1935 Treasury report [1] so presumably that's when they were fully redeemed. [1]https://www.treasurydirect.gov/govt/reports/pd/mspd/pre1997/pre1997_1935.htm https://www.treasurydirect.gov/govt/reports/pd/mspd/pre1997/...
  - spiralx 8y ago
    Here's one :) https://www.youtube.com/watch?v=cfSIC8jwbQs https://www.youtube.com/watch?v=cfSIC8jwbQs
dageshi 8y ago
The thing you're missing is that government debt has an automatic expiry date to it, for example 10 years. So the question is, if I lend the US government my money for 10 years am I more or less likely to get it all back than if I lent it to a third world nation? With the US gov whether the republicans or the democrats are in power I can reasonably assume I'll get my money back, can I say the same about the various political parties in a third world country were they to be elected? The AAA/AAB style ratings are simply estimates of that reality.
m-i-l 8y ago
In the case of US, it is because the dollar is by far and away the largest international reserve currency, which gives the US what is known as the "exorbitant privilege"[0]. Putting it simply, this means few countries are going to let anything bad happen to the dollar because if it does most countries would suffer, and as a result the US can get away with things other countries could not, such as building up trillions of dollars of national debt. The same applies to the other countries whose currencies are used for foreign reserves, but on a much smaller scale given relative proportions. [0] https://en.wikipedia.org/wiki/Exorbitant_privilege https://en.wikipedia.org/wiki/Exorbitant_privilege
Tsubasachan 8y ago
The US is a special case. Every country is caught up in it. It can't be allowed to fall or we all go down with the ship. America is exempt from the rules. Other developed countries DO keep their deficit in check. And they make their payments on time. Indians don't trust their own government, why would foreign lenders?

amriksohata 8y ago

EU states

kchoudhu 8y ago

When was the last time the US or the UK defaulted on their debt? The credit rating system is necessarily bayesian, and EM markets all have their most recent defaults within the models' event horizons.

tonyedgecombe 8y ago
The UK defaulted in the thirties although I think there were unusual circumstances and it was a debt to the US government.
- kchoudhu 8y ago
  Yeah, interallied debt to the US was linked to German reparations which stopped in 1932 (I think?). The US wasn't fussed about it...so I'm not sure it was a default. The other one I can think of was the downgrade of the coupon on WW1 war bonds from 5% to 3.5%. Again, seemingly everyone agreed with this, so there is some debate over whether it was an actual default.
arcticbull 8y ago
USA: 1979, 1933, 1861 and 1790. [1] https://www.theglobalist.com/a-brief-history-of-u-s-defaults/ https://www.theglobalist.com/a-brief-history-of-u-s-defaults...

kopo 8y ago

Debt really translates to assets sitting somewhere. If Somalia defaults you might end up owning a couple goats but if US defaults maybe you get an Airfield.

cm2187 8y ago
State defaults and restructurings don't quite work like that. If the state won't pay its debt there is not much you can do to enforce it. The real difference is that the US or European countries are borrowing in their own currency and under their own laws (well for euro area countries, sort of). So they will inflate their debt away. EM countries typically borrow in USD and often under foreign law and don't have the option to inflate away. But Greece found itself with effectively a foreign currency debt (EUR which they don't control) and ended up defaulting (well, technically "restructuring" but that's the same).
- jon_richards 8y ago
  What's really weird is that if the USA started inflating their debt away, the value of their debt would drop and they'd need to start borrowing at a higher rate. As long as the USA willing to increase the size of their debt, that doesn't happen. For this to continue, people need to keep lending the USA money, so that the USA can pay off their old debts. People are willing to lend the USA money as long as they don't think the USA will start inflating their debt away. There isn't really a limit to this. Loans to the USA are stable because people keep loaning to the USA because loans to the USA are stable. The size of the debt doesn't affect that equation.
- icelancer 8y ago
  > So they will inflate their debt away. You say this, but it doesn't work nearly as easily as you seem to think. You cannot just devalue your currency and pay people off with zero effects. And if that was actually a threat, the US would not have an AAA credit rating.
  - cm2187 8y ago
    Oh I agree, inflation is nasty. This accumulation of debt will end in tears.

elisharobinson 8y ago

Not too far of the mark, But the size of an economy matters more. The United States is the only exception to an otherwise straightforward system of supply and demand the USD is required for most forex transactions which keeps its credit rating propped UP. In all other cases, the size of the economy dictates its credit rating and not always the amount which is owed to its creditors.

tormeh 8y ago

What makes you think the debt is not going to be paid back? These are bonds, they come due are repaid continuously. In any given year, any given western government are repaying bonds (and also selling new ones).

jplayer01 8y ago

It matters what currency the debt is in and to whom it is owed.

Arnt 8y ago
In what way? Hedge funds have a long history now, and the core of their business model is (simplifying) to arbitrage such differences. So what's left? Whose currency is irrationally treated? Which lenders make a borrower more/less secure?

icelancer 8y ago

The United States has never missed a coupon payment and it doesn't look like it will for the forseeable future (many, many decades). What would you call that besides the best credit any organization could possibly have?

cm2187 8y ago
The US is critically reliant on creditors rolling their debt. At one point the music will stop. They will then likely inflate the debt away rather than miss a payment but this biggest accumulation of peace time debt in history will end in tears somehow.
- icelancer 8y ago
  There have been multiple pauses of music and it hasn't really done much to the USD. The argument that the music will stop requires there to be a new conductor and financial instrument that can replace the USD and the role that the United States plays in the world economy. The EUR was the closest thing we've had in my lifetime, if you don't count all the ridiculous goldbug rushes we've had in the last five decades - the same people saying the exact same thing you are, who have been perpetually wrong when compared to any other type of financial instrument such as the S&P500 or more recently, VTI. I am no fan of carrying enormous amounts of debt. I critically disagree with the United States economic and fiscal policies of the last twenty years, including most quantitative easing initiatives. But if you think the AAA credit rating is somehow fake or corrupt, no metric-driven analysis that even remotely resembles fairness would agree with you. Only theories like "the music will stop" do.
  - suff 8y ago
    The phrase, "cleanest shirt in the laundry basket" comes to mind. Relatively speaking, the US is in a much better place than others, even if it isn't perfect.
    - Tsubasachan 8y ago
      There are countries in the EU who manage budget surpluses. Its why the EU can bail out Greece and soon Italy. Its not impossible.

raverbashing 8y ago

In one sense yes, it's a bit unfair (see the 2008 fiasco with the CDSes) In another, they don't care that a country's debt go to zero, they care that the titles they have (used to be paper, today it's all electronic - but they have a maturity date, a face value and some pay interest periodically) get paid. If they sold a new coupon to pay that debt they're paying now is not so important (usually) But then again if the US or Japan/China/some big EU player defaults in a big way that suddenly becomes the least of your problems.

icelancer 8y ago
> CDWs You mean Credit Default Swaps (CDSes)? [Or perhaps Mortgage Backed Securities?] Outside of the SEC being stupid enough not to regulate these instruments, the government didn't have much to do with over-leveraging of the private sector. Though the government did give everyone who fucked up a fall from grace rather than what they deserved, which is bankruptcy and the other side of capitalism that our system tends to forget exists when it is convenient.
- rtpg 8y ago
  > Though the government did give everyone who fucked up a fall from grace rather than what they deserved I understand this feeling and also wish that there was some sort of moral reckoning. But I feel like the better end state for society is "everyone has access to the same fall from grace that the rich and powerful have" rather than "_everyone_ gets to experience the crushing, arbitrary justice system that those at the bottom rungs of society experience".
- raverbashing 8y ago
  Yes, CDSs, sorry

pjc50 8y ago

> is never going to be paid back It will probably never be paid down to zero, but this doesn't matter. The debt is made of individual bonds, which have a duration (usually up to 30 years), and are paid back at the end of that duration. By taking out new bonds. They are valuable because what else are you going to do with your money, when you have a large amount to safeguard?

lordnacho 8y ago

They always pay back any individual loan because they can get a new one to cover the expense. That's what the rating agency is judging, whether they can in one way or another pay back what is due.

gaius 8y ago

never going to be paid back Many investors in government bonds don’t want to be paid back. They just want interest payments forever. So the rating is really just about the confidence that it will happen. I was chatting to a guy from Sybase once who had written some special date-handling code at the request of a customer who was still handling payment streams from the time of Napoleon.

codeisawesome 8y ago
Napoléon was first emperor in 1804 - if it was from then, we’re talking 214 year old debt - fascinating!
- OldHand2018 8y ago
  > Napoléon was first emperor in 1804 - if it was from then, we’re talking 214 year old debt - fascinating! The UK issued perpetual bonds starting in 1751. They were called Consol Bonds, but they were all redeemed in 2015. The US has historically issued Consol bonds with the right of redemption. The last mention of Consol bonds I can find is the June 1935 Treasury report [1] so presumably that's when they were fully redeemed. [1]https://www.treasurydirect.gov/govt/reports/pd/mspd/pre1997/pre1997_1935.htm https://www.treasurydirect.gov/govt/reports/pd/mspd/pre1997/...
- spiralx 8y ago
  Here's one :) https://www.youtube.com/watch?v=cfSIC8jwbQs https://www.youtube.com/watch?v=cfSIC8jwbQs

dageshi 8y ago

The thing you're missing is that government debt has an automatic expiry date to it, for example 10 years. So the question is, if I lend the US government my money for 10 years am I more or less likely to get it all back than if I lent it to a third world nation? With the US gov whether the republicans or the democrats are in power I can reasonably assume I'll get my money back, can I say the same about the various political parties in a third world country were they to be elected? The AAA/AAB style ratings are simply estimates of that reality.

m-i-l 8y ago

In the case of US, it is because the dollar is by far and away the largest international reserve currency, which gives the US what is known as the "exorbitant privilege"[0]. Putting it simply, this means few countries are going to let anything bad happen to the dollar because if it does most countries would suffer, and as a result the US can get away with things other countries could not, such as building up trillions of dollars of national debt. The same applies to the other countries whose currencies are used for foreign reserves, but on a much smaller scale given relative proportions. [0] https://en.wikipedia.org/wiki/Exorbitant_privilege https://en.wikipedia.org/wiki/Exorbitant_privilege

Tsubasachan 8y ago

The US is a special case. Every country is caught up in it. It can't be allowed to fall or we all go down with the ship. America is exempt from the rules. Other developed countries DO keep their deficit in check. And they make their payments on time. Indians don't trust their own government, why would foreign lenders?