by Stephen McPhie, CA
Partner, RSD Solutions Inc.
Moody’s has placed its Aaa U.S. government bond rating on review for possible downgrade. Financial institutions linked to the government rating such as Fannie Mae and Freddie Mac are also placed on review. This is because the federal debt limit may not be raised in time leading to default because of a late interest or principal payment. Most assume default would be of short duration but such talk would have been unthinkable until very recently.
Across the pond, it was assumed that markets would move their attention from Greece onto Portugal and Ireland. However, the focus has shifted to the much bigger fish of Spain and Italy with sharp increases in their debt yields. European politicians are still muddling around trying to find a way to get out of the mess without creating a formal default on debt where there is no foreseeable means of repayment – at least for Greece and likely Portugal. But there is stiff resistance in Germany in particular to bail out private investors in the troubled sovereigns at the expense of domestic taxpayers. Of course politicians everywhere usually want to win the next election above all else so they have one eye on how to fix the unthinkable and the other on opinion polls.
Whatever happens, we have the recipe for a degree of turmoil. Not just for the countries directly involved but turmoil which could easily spread to exchange rates, interest rates, commodity prices and the global economic outlook generally. So if you have exposures in any of these areas have you identified, quantified and instituted robust risk management strategies? Have you evaluated and updated your existing risk management processes recently, possibly with an independent external evaluation? Isn’t it better, cheaper and more comforting to fix the roof before the storm?
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