In case you somehow missed it: US downgraded to AA+

S&P has downgraded the US from AAA to AA+.

Is this economics? Is this politics? Is this accurate? All good questions.

Does it matter? Not really.

There may be some technical problems associated with the definition of “risk free” particularly when it comes to discounting cash flows at at “risk free curve”. The problem South Africa has in determining risk-free discount rates under Solvency Assessment and Management are now clouded by our own credit standing, the PIGS drama and now even the US.

But as I bravely or foolishly predicted recently, I don’t think this will make a different to US yields. I’m feeling a little less confident of my prediction now. Not because I think the downgrade itself will have any medium term impact on US yields, but just because US yields are at extreme lows and can hardly decline much further, but can always still rise.

I’ll stick by the prediction and see what happens.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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