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An Inside Look at Sovereign Debt

04/05/2012 1:00 pm EST


Martin Weiss

Chairman, Weiss Research, Inc.

Martin Weiss points out why the ratings of the well-known debt rating agencies are flawed, and what his own ratings are now saying about the status of US debt.

Martin, the news is just filled with Greece. The rioting, the striking again today after a strike last week…it’s affected our markets greatly, even though Greece is not one of the hugest economies in the world. But even today, we’re hearing about all of the PIIGS countries, but there are a lot of other countries that are in serious trouble, too, out there.

Yes, and I have a list of them, if you’d like, I can give you.

I would.

The reason we have a list is because over a year ago, we launched our own sovereign debt ratings. As you know, for many years we’ve been rating banks and insurance companies. Now we’ve expanded that to include sovereign countries.

What we find is just like with the banks and just like with other ratings—the major agency ratings…S&P, Moody’s, and Fitch—because they’re still using the issuer-paid model, they have not really given us the truth about many of the countries. They are downgrading, so they do see the same things we do.

But from a lofty level.

From a lofty level. There is a conflict of interest there in that they are paid. Those ratings are in effect bought and paid for by the rated countries or the rated institutions.

And they do not have a very good track record of rating properly, as we have seen with the bank failures. No one in the rated agencies other than Weiss really saw that coming.


And we were all caught flat-footed.

And according to Forbes—and it’s true—ours was the first rating agency in the world to downgrade the US government.

Very interesting.

There also, there is a tremendous political conflict of interest. And even though S&P finally did announce a downgrade, it did so only years after the US government’s finances fell to a level below the level of countries that S&P rates lower than the United States.

I agree. It was warranted for a long time, and no one wanted to take the political upheaval from it. So, what are the top three or four countries that you think have the worst sovereign debt problems? And then can you segue into that and tell us how that will affect our markets over in the US?

Well, we know about the PIIGS countries. What people don’t know about are some of the biggest indebted countries, and that’s the United States. The United States gets from Weiss ratings a grade of C-minus.

Which sounds horrible if you look at the rest of the ratings columns.

Well, it is bad. It’s not as bad as it sounds, because our scale runs from A to E, whereas their scale runs basically from A to C. So a C in their scale is junk. In our scale, it’s a little bit better than that. It’s one notch better than junk, or the equivalent of approximately a BBB-minus on S&P.

So it’s still very bad compared to their rating, which is still AA-plus. And so the US is really the primary problem in the world when it comes to excessive debts. And it is vulnerable to some of the same kinds of problems that we’ve seen in the PIIGS countries.

And so what happens from the investor’s point of view? How is that going to affect me as a mom and pop investor? I mean, people hear about it and oh, okay, maybe it’s harder to sell the bonds and maybe people have to pay a higher rate of interest. Okay, so that’s one thing. We’re going to all have to shell out more money, or government debt is going to continue to increase.

Well, look at what’s happened to the US economy. Despite the fact that interest rates, especially on government securities, are very low—the lowest in history—the economy is still struggling. Despite the fact that interest rates are at the lowest in history, the housing market is still in a depression. So now imagine what will happen to housing, to the economy, to the stock market, to all of your investments, if interest rates go up.

Well, in a crisis like we’ve seen in Europe, a sovereign debt crisis, that’s what happens. Interest rates go up whether the government wants them to or not. So that’s how it would impact you, in your home, in your savings, and in your stock market investments and so forth.

So give me one play where an investor could make money from that.

Well, there are many. You can actually bet on higher interest rates with ETFs that are designed to make you money when interest rates go up.

But the best bet is to wait for those interest rates to be high enough to be attractive, and then lock in those yields for years to come with long-term investments, long-term fixed income securities.

It’s not the time to buy them now. They’re just too expensive. But when those prices go down and their yields go up, it may be time to buy and lock in some high interest rates.

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