AAA OR NOT AAA?

Global - Dec 14 2018

Analyst insight

Sovereign assets with high ratings often remain regarded today as without material risk.

This signal can however lead us to neglect some of the major issues faced by sovereign debt, in part due to the very non-linear macro risks that can affect this asset class throughout history. In this context, let us look at some of the limitations of AAA ratings. Could we simply suggest that AAA should probably be re-thought to better take into account some “fat-tailed” risks, such as risks of energy and climate shocks or risks related to socio-political tensions? As mentioned very recently by a member of the Executive Board of the ECB (Benoît Coeuré) on climate change: “the distribution of shocks may become more “fat-tailed”.”

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