Why companies are rated higher than their governments...
In this issue:
» India enjoys healthy receipts per tourist
» Will the Indian govt. get down to serious lawmaking?
» Signs of competition easing in Indian mobile market
» Credit downgrade risk continues to haunt the US
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Years of indiscriminate spending and the global financial crisis of 2007-09 have piled up massive debt on the books of the US and European governments. So much so that risk of a default seems imminent and the possibility of a credit ratings downgrade just around the corner.
Therefore, it comes as no surprise that many multinational companies operating in highly indebted economies are attracting higher credit ratings as compared to their home governments. Take the US for instance. The last few weeks have displayed the US on the brink of a major crisis as debt default loomed large. But quite a few US multinational companies have not necessarily met with the same fate. Infact, since the crisis quite a few American companies have worked on generating high cash flows and cutting down debt. Further, the subdued economic environment in the US has meant that those companies having operations in the emerging markets have done particularly well. And it is not just the US. This phenomenon has been observed in Europe and Japan as well. Globally, 107 corporate and local governments have higher ratings than those of the sovereign in their country of domicile on a foreign currency basis according to Standard & Poor's.
Emerging market economies, meanwhile, continue to attract both investors and major corporations. Although the former are plagued with the challenges of high inflation and interest rates, they are still expected to perform much better than their developed peers. And companies headquartered in the US and Europe are looking towards these economies to strengthen their balance sheet and generate more cash. Indeed, does that then mean that corporate bond market will begin to attract more attention than the sovereign debt market? One will have to wait and see.
Do you think that investors will increasingly opt for corporate debt in the future as opposed to government debt? Share with us or post your comments on our Facebook page.
01:26 | Chart of the day | |
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Data Source: The Economist
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The sentiment is already low on account of global manufacturing running out of steam. In this scenario, a similar outcome for a much larger services sector will be another nail in the coffin of the global economy.
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04:56 | Today's investing mantra |
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6 Responses to "Why companies are rated higher than their governments..."
T C THOMAS
Aug 3, 2011Based on the present situations in telecom sector, Is RCOM is a good company for our fresh investment and staying with them as long as they remain good?
knarayan
Aug 2, 2011Corporations are driven by the tempo of higher quarterly performances and hence strive to show better performances. Governments are governed more by the policitical pulls and pressures of cross subsidisation, the world over. The trend will tilt obviously towards corporate debt of sound corporations rather than sovereign debt whose questionability of repayment in the near future poses a big doubt. Why can't the US government raise corporate taxes since almost all the corporations are reporting higher profits YOY?? The Republicans won't agree to this, I bet!
srinin
Aug 2, 2011Seth (above)makes an excellent point. But a situation that needs a fundamental correction. We need a out of the box thinking to change the way the finances of teh govt are rated vis a vis a corporate entity since the nature of the two are very different.
Part of the problem of the Global Financial Crisis is due to this unfortunate linkage between troubles in private enterprise cascading into govt financial territory.
S.K.DAMANI
Aug 2, 2011Well many of the Bills in the Parliament will be passed. During the previous session also many important Bills were passed in "minutes', without any debate as the main oppn. BJP walked out. The government sized the oppurtunity and many Bills were passed with out any debate. Same will happen again.
The slutwalk or "besharami" walk should have had many of the present ministers. They would have definetely represented the true 'besharmi' of Indian politics.
(No particular political affiliation.)
Thanks Damani
seth
Aug 2, 2011Consistancy is the major difference between MNCs and Governments.While corporates generally follow a set pattern of doing business regardless of who is at the helm of the company, Governments on the other hand can radically alter their track with the change of leadership. The change does not always go down well with the investors. QED
khalid qaisar
Aug 12, 2011yes, beacuse the fundamentals of many companies are rock solid amid the scenario of WEAK fundas. of many countries.