Prasant.net

Over the past couple of weeks, I have been working on a paper estimating Risk Free Rates depending on the currency, based on similar work by Aswath Damodaran. Also part of my reading list was “Into the abyss: What if nothing is risk free?” by the same author and it almost reads like a prophecy now, given the downgrade of debt issued by the US Treasury by S&P from AAA to AA+.

In real terms though, the five-year probability of a default for AA+ rated soverign debt is the same as that of a AAA rated instrument – 0.00. The cost of borrowing isn’t likely to sky rocket either, if the experience of Japan is taken into account, especially given that two of the three major ratings agencies – Moodies and Fitch – still haven’t mentioned anything about a ratings downgrade.

However, this does add another one of those ‘once in a lifetime’ events that I have seen in my short career thusfar – The fall of Bear Stearns, Lehman going bankrupt, the Madoff scandal and the loss of the AAA status.