Ignorance is scary.

On August 5 last year Standards and Poor's reduced the credit rating on US sovereign debt to AA+ from AAA which is the highest rating. The US government found a $2 trillion dollar mistake in S&P's calculations and its chairman, Deven Sharma was made to resign within 2 weeks of the downgrade. On August 8, the first trading day after the downgrade yields of US 10 year bonds were at 2.40, today they have dropped to 1.89 as investors have sought safety in the dollar because of uncertainties elsewhere, especially in the Eurozone. Last week S&P downgraded 10 countries, including France, using the Euro. Portugal and Greece were at junk status anyway. Germany, Finland, Luxembourg and Netherlands were left at AAA while Belgium and Estonia were left unchanged at AA and AA- respectively. All the countries except Germany and Slovakia, which is at A, have been put on negative outlook. The other 2 ratings agencies, Moody's and Fitch have remained unmoved. It would seem that S&P is right in its pessimism. Greece was unable to persuade private investors to take a 50% haircut on its debt which is the condition for the release of the next tranche of its bailout money. Experts predict a 99% chance that Greece will default on its debt. Some say that European politicians have already accepted that Greece will default and leave the Euro and are trying desperately to make it an orderly affair so as not to cause chaos in the markets. Some say that there is no provision in the Maastricht treaty for any country to leave the Euro so the currency will have to be abandoned. Italy, which has seen its rating downgraded 2 notches from A to BBB+, will need to redeem $193 billion worth of debt this year with $31 billion coming up in February. All this should have created panic in the markets but all seems calm. Italy's 10 bond yields have dropped to 6.634% while that of Spain has dropped to 5.103 from 5.323%. Germany actually sold 6 month bonds at negative yields. Normally bonds are sold at slightly less than their face value. When they are redeemed investors are paid the full value, the difference being their profit. Last week investors paid 100.00616 on bonds with a face value of 100 which means they are paying Germany for the privilege of buying the bonds. Why? Why are they deliberately booking a loss? Surely holding cash would have at least been more profitable. Are they using their Euros expecting to be paid back in Deutschmarks? It is like Jurassic Park. Where will the T Rex appear from. Terrifying yet fascinating.