By Stephen McPhie, CA
Partner, RSD Solutions Inc.
Does your company revisit assumptions upon which your approach to risk is based? Are assumptions challenged? Is there a dynamic process to do this? Throughout most of my career, U.S. government obligations have been considered to be the definitive risk free debt. No longer, now that S&P has placed it on negative outlook. Willem Buiter, a former member of the Monetary Policy Committee and now chief economist at Citigroup, told the CFA Institute annual conference in Edinburgh[1]: “S&P’s negative outlook (on the US) is likely to be followed by a negative watch and then a downgrade early in 2013, unless a miracle happens …”.
Should this have been foreseen some time ago? I would argue that this assumption about U.S. government debt should have been questioned several years ago. In fact, perhaps it should never have been taken as an assumption.
Nothing is risk free and no assumptions are valid beyond the moment they are made. That is why a risk management system must be dynamic, and not imposed statically and left to apply until someone new comes in and decides to do an update, perhaps years later.
[1] As reported in the Herald www.heraldscotland.com/business/markets-economy/us-economy-may-face-debt-downgrade-1.1100695
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