Triple-A: Are Any Assets Truly Risk-Free These Days?

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Standard and Poor's warned six European countries this week that they could lose their triple-A credit ratings. In August, S&P downgraded the U.S. from its top-shelf credit status. All this raises the question of whether any assets are "risk-free" triple-A in today's unsettled global economy.

STEVE INSKEEP, HOST:

European leaders are fuming after the ratings agency Standard and Poor's said it may downgrade the credit of countries that use the euro, including France and Germany, which now have triple-A credit ratings. Over the summer, S&P downgraded U.S. Treasury bonds, long seen as one of the safest investments in the world. Now some analysts are asking whether these days any investment is really risk-free. NPR's Chris Arnold reports.

CHRIS ARNOLD, BYLINE: A triple-A rating on a security basically is supposed to mean that it has no risk - or virtually no risk. You invest in it and you won't lose your money. That's the theory. But in the recent subprime mortgage debacle these ratings were spectacularly wrong.

FELIX SALMAN: Well, we've learned during the financial crisis that there's a lot of risk in triple-A ratings.

ARNOLD: That's Felix Salman, a financial blogger with Reuters. He does not like triple-A ratings, and this latest round of financial problems in Europe for him underscores why. The problem he says is the triple-A rating is kind of a myth, the world is not a perfect place, and every investment must have some element of risk so why pretend that it doesn't?

SALMAN: Well, the problem with the triple-A rating is that it basically makes people brain dead. Triple-A is what caused the financial crisis.

ARNOLD: Okay. It might not be the only thing that caused the financial crisis, but Salman says it makes investors lazy and sloppy. And so he'd like to move all ratings run lower from triple-A down to what's called double-A or double-A-plus.

SALMAN: AA-plus doesn't carry the same connotations that triple-A does. No one will look at a double-A-plus and say that's risk-free.

ARNOLD: Now here's where Salman starts to sound a little bit like he's making the same argument as the guitar player Nigel in the spoof rock band movie "This Is Spinal Tap."

(SOUNDBITE OF MOVIE, "THIS IS SPINAL TAP")

CHRISTOPHER GUEST: (as Nigel Tufnel) This is top to a, you know, what we use on stage, but...

ARNOLD: In the movie Nigel is being interviewed about his guitar amplifier, where the little volume knobs are labeled on a scale of one to 11, instead one to 10, like most amps.

(SOUNDBITE OF MOVIE, "THIS IS SPINAL TAP")

GUEST: (as Nigel Tufnel) Look, right across the board, 11, 11...

ROB REINER: (as character) Oh, I see. And most of these amps go up to 10.

GUEST: (as Nigel Tufnel) Exactly.

REINER: (as Marty DiBergi) Does that mean it's louder? Is it any louder?

GUEST: (as Nigel Tufnel) Well, it's one louder, isn't it? It's not 10. One louder.

REINER: (as Marty DiBergi) Why don't you just make 10 louder and make 10 be the top number and make that a little louder?

GUEST: (as Nigel Tufnel) These go to 11.

ARNOLD: The point being that if you call the top rating triple-A or double-A, what's really the difference? Salman says there would be one, but some professional money managers are unconvinced.

SALMAN: It's silly to call for the abolition of the triple-A rating.

ARNOLD: David Kotok is the top investment officer at Cumberland Advisors and he spoke to us just before hopping on a plane to Europe to go meet with officials there to get the latest on the emerging sovereign debt plan.

DAVID KOTOK: We need a triple-A plan. We need a triple-A rating. We need a double-A rating. We need a single-A rating. We need a scale. We need a system. The rating agencies made a mess out of that and now they're in the process of trying to fix it.

ARNOLD: Kotok says even right now amidst all the global financial turmoil, there institutions that deserve a triple-A rating.

KOTOK: Yale University is a triple-A credit. It has a huge endowment. There are very sound triple-A credits. The probability of default is near zero.

ARNOLD: But at the moment, big powerful nations are not looking like such risk-free investments. John Chambers is chairman of the Sovereign Ratings Group for Standard & Poor's or S&P.

JOHN CHAMBERS: Well, I think it's a valid question whether government securities are a triple-A asset class. We have 20 ratings between triple-A and D and we try to, you know, call the increments are we see them.

ARNOLD: As far as whether European nations can protect their current credit ratings by coming to an agreement to stabilize the financial troubles there...

CHAMBERS: Well, we have hopes and we - if we had no hope then we would have, you know, lowered the ratings outright.

ARNOLD: So the message seems to be clear to European leaders; hammer out a financial crisis plan or facing having your country's debt downgraded by S&P. Chris Arnold, NPR News.

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