It’s been a less-than-stellar day for the United Kingdom. Thanks to the Brexit vote, markets seem to be pummeling any company that so much as employs someone with a British accent. The pound kept falling. There was that football match. Meanwhile, both Standard & Poor’s and Fitch downgraded the country’s credit rating.
Much like England’s defeat on the pitch Monday, the downgrades are mostly a blow to national pride, since actual investors don’t really care much about what the agencies have to say when it comes to sovereign debt. Remember when S&P stripped the United States of its AAA credit rating? We probably deserved it after that whole debt-ceiling standoff, which temporarily called into question the full faith and credit of the U.S. Treasury. But Washington hasn’t exactly had trouble borrowing money since. Likewise, in spite of warnings that downgrades were imminent, yields on 10-year British government bonds hit historic lows Monday. Britain may be about to blow a hole in its economy with this whole secession thing, but the markets still think lending to Her Majesty’s Treasury is a safe bet in a scary world. Which makes sense. Britain controls its own currency, so even in the event of a severe, Brexit-fueled recession it shouldn’t have any problem paying its debts. And though the pound sterling has lost a good bit of value since the referendum, it hasn’t fallen enough to spark uncontrolled inflation, which could theoretically hurt bond investors.
The reason nobody feels especially concerned about whether large countries have a AA or AAA credit rating is that the agencies don’t really have any special information or insight when it comes to sovereign credit. They’re working with the same public data and news reports as the rest of us. Fitch can theoretically assign an analyst to look at the nitty-gritty details of a mortgage-backed security and come up with a valuable judgment on its likelihood of paying off. (In theory. In practice, as the financial crisis proved, their judgment isn’t always that valuable.) With a whole country, though, they’re pretty much licking their finger, putting it to the wind, and concluding, “Yeah, British politics look a little crazed right now.” Just like everyone else who’s been paying attention.
