Is a Sovereign Credit Event a Disaster?

by Edwin M. Truman

Financial Times
July 20, 2011

On both sides of the Atlantic, policymakers face sovereign credit events. If those events materialize, will the result be a disaster? Yes and no. Yes if the credit event occurs in the context of a failure by policymakers to address convincingly the underlying short-term and medium-term economic, financial, and political issues. No if the credit event occurs in the context of a convincing program to address those issues.

Who has to be convinced? Market participants and the general public more broadly will be the final arbiters—not the accountants and credit rating agencies (CRAs). At present, markets are far from convinced that policymakers will come close to doing the right thing, and the general public is confused about the implications of a sovereign credit event.

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