Monday, August 08, 2011

S&P ratings and the Sovereign Ceiling

One feature of the S&P rating adjustment is that it defies one of the old rules I learned on the Fixed Income trading floor in my brief banking days. That a company's bond rating can never be better than the bond rating of the country it is based in, because if the country defaults, chances are the economy in that country will go to crap causing all the companies within to likely defualt as well.

Thus Pr[company default] = Pr[country default] + Pr[company default | ~country default ] > Pr [country default]

The recent downgrade of the US seems to violate that precept. I suppose the rule was absolute, and US companies are global enough that you could imagine situations where the US defaulted but Microsoft or Exxon did not. It just struck me as odd and notable that no one has mentioned it.
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