If stock markets were rattled on Thursday – and remain subdued on Friday – because of concerns stemming from Standard & Poor’s decision to lower its outlook on the U.K.’s credit rating to “negative” from “stable” due to its ballooning debt levels, perhaps markets are overreacting.
That, at least, is one side of the issue, as investors grow nervous that if the U.K. loses its top-notch triple-A credit rating, then indebted United States would come next, potentially sinking the dollar and driving up borrowing costs in the process.
However, Bespoke Investment Group believes these concerns are nonsense. For one thing, they noted that credit rating agencies were widely derided during the credit crisis, when they failed to warn investors of the risks inherent is many of the complex financial instruments tied to the U.S. housing market. So why pay attention to credit rating agencies now?
For another, Bespoke pointed to the price on credit default swaps – essentially, insurance against a default – on U.K. sovereign debt. That price has actually fallen, a lot, since peaking in late February. Indeed, the cost to insure U.K. debt is down 50 per cent. After S&P issued its new outlook on Thursday, the cost rose, but only by a smidgen.
“This move barely shows up on the chart and highlights that the bond market surely doesn’t care about S&P’s call,” Bespoke said on its blog. “And where the heck was S&P prior to and during the 900 per cent (yes 900 per cent!) rise in UK default risk in 2008 and early 2009?”
