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The United States, the United Kingdoms and France have been removed from the “nine-A’s” club, the pool of government bonds with triple A status as rated by Fitch, Moody’s and Standard & Poor’s. Estimates show that this has caused a sixty percent shrink in the market from $11 trillion to $4 trillion. This reduction is largely a result of the United State’s downgrade in August 2011.

There have also been several credit upgrades in emerging markets. The countries topping that list are Uruguay, Bolivia and Brazil. David Riley, global head of sovereign ratings at Fitch said: “Five years ago, the world was a fairly predictable place. Banking crises were typically things that happened in emerging markets. Now we’re in a world where a lot of those assumptions have gone.”

Western economies still dominate as the heavy weights for government bonds but the gap between them and emerging markets such as Latin America and Asian countries is closing. Bart Oosterveld, head of sovereign ratings at Moody’s said that these shifts show “where strong and sustainable growth is likely to be in the future.” John Chambers, chairman of S&P’s sovereign ratings committee, points out that the reason why these emerging countries have been able to move up the totem pole, for lack of a better phrase, is because they have undertaken reforms that have improved their credit standing. These reforms were able to take place because of “[b]etter economic conditions,” Chambers said. Pointing out that “[i]t is easier to carry out reforms when the wind is on your back, rather than in your face.”

What these upgrades and downgrades have created is a larger pool of government assets rated in the BBB range as well as a reduction in the pool of government assets rated AAA. Some worry that a further reduction in the pool of AAA rated assets could cause a collateral crunch—a shortage of those assets that can be used as security by banks and others when borrowing in capital markets or from central banks. However, most would say such a crisis is still far off in the distance.

Even if a collateral crunch is not around the corner what can we do return America to a AAA rating? What can we do to ensure a collateral crunch never does become a reality? Also, if America’s rating continues to decline what would that mean for us in the long run?

Source: Financial Times Article

For more on a “collateral crunch” see Regulation: Collateral damage