Credit Ratings and International Capital Flows:

Implications for the Dollar

Dr. Catherine L. Mann Barbara ’54 and Richard M. Rosenberg Professor of Global Finance

International Business School, Brandeis University Visiting Scholar, Federal Reserve Bank of Boston.

CLMann @ Brandeis.edu

Debt Rating Agencies’ Role in the Global Debt Capital Markets: Past,

Present, & Future Global Interdependence Center, Philadelphia

February 2012

Outline

•  Big picture on economic recovery

•  Credit enhancements matter •  Prospects for international capital flows

•  CDS commentary

•  Implications for the dollar

Recession and Recovery: Output

Recession and Recovery: Employment

Economic Recovery: Trade

!"

#!!!!!"

$!!!!!"

%!!!!!"

&!!!!!"

'!!!!!"

(!!!!!"

)!!!!!"

*!!!!!"

#++'" #++("" #++)" #++*"" #+++" $!!!"" $!!#" $!!$"" $!!%" $!!&"" $!!'" $!!("" $!!)" $!!*"" $!!+" $!#!"" $!##"

!"#$$%&#"'(")*"+'(),-#.$))

"",-./012"/3"4//52"675"2809:;82"

""<=./012"/3"4//52"675"2809:;82"

Data: BEA ITA Tb 1

Economic Recovery: International Capital

!"#####$

!%#####$

#$

%#####$

"#####$

&#####$

'#####$

())*$ ())&$$ ())+$ ())'$$ ()))$ %###$$ %##($ %##%$$ %##,$ %##"$$ %##*$ %##&$$ %##+$ %##'$$ %##)$ %#(#$$ %#(($

!"#$$%&#"'(")!*+,-*.)/.#0$)12(-3)-./.!01234$566376$589054:$3;<=>4?2@$A252<?5=$

439?B5CB36$D?2<93563EA252<?5=$0>F=01$D!GG$

H093?@2!01234$566376$?2$7I3$-2?734$/75736:$3;<=>4?2@$A252<?5=$439?B5CB36$D?2<93563EA252<?5=$?2J01$DKGG$

Data: BEA ITA Tb 1

7  BEA,  Intl  Trans,  table  5.  

Credit  Enhancement  Ma/ers:      Foreign  Official  Purchases  of  Official  US  Assets

Foreign  Official  Investors  increasingly  bought  Agencies:  ‘same’  risk  as  UST  and  higher  return  

8  Treasury, TIC, fpis.sjtml

Credit  Enhancement  Ma/ers:      Cayman  Islands  holdings  of  ST  Agencies

!"#####$

!%#####$

#$

%#####$

"#####$

&#####$

'#####$

(#####$

)#####$

!""!##

!""$#

!""%##

!""&#

!""'##

!""(#

!"")##

!""*#

!"+"##

!""+,+-,$#./#

01221345#63/73/.89#:34;5<#=3/91>4#?98#@A/BC.595#

DE#/9>134########F51.#

######G.H4#FI9/1B.J#9KB2A;14>#6./1DD9.4#L4.4B1.2#B9489/5#

######6./1DD9.4#L4.4B1.2#B9489/5#M!M#

######6.4.;.#

##N4189;#O14>;3I#

PA/379#9K#NO##

Credit  Enhancement  Ma/ers:      Europe  (and  CFC)  bought  AAA  Asset  Backed  Bonds

Data: BEA ITA Tbl 8a

10  

Data: BEA ITA Tbl 1

Millions$

(Lack  of  )Credit  Enhancement  Ma/ers:      Sloshing  cross-­‐border  inter-­‐bank  funding  dominates

11  Data: BEA ITA Tbl 8a

Credit  Enhancement  Ma/ers:      Only  gross  flows  of  UST  have  recovered  

12  Data: Federal Reserve, Flow of Funds f107

Credit  Enhancement  Ma/ers:      New  high-­‐return,  low  risk  asset–  munis?    

!"

!#$"

%"

%#$"

&"

&#$"

'"

'#$"

("

!"

$!"

%!!"

%$!"

&!!"

&$!"

'!!"

'$!"

&!!)" &!!*" &!!+" &!%!,%" &!%!,&" &!%!,'" &!%!,(" &!%%,%" &!%%,&" &!%%,'"

-./0123"45/678909".:";3."<0:85=>;"8990>9"

!"#$%&'%&(&)*&+)+',&-#'#.$',&'%%/+%&

012&(&)*&+)+',&-#'#.$',&'%%/+%&&

CDS focus: Counter party risk, not payment risk

CDS focus: CDS, spreads, euro exchange rate

15  

Mann, “How Long the Strong Dollar (2002); calculated Using OECD financial data

Implications for the Dollar: Appetite for US exposure?

Shrinking marginal

allocation to US assets:

Compared to late 1990s, global asset

allocation rebalanced

away from US assets

%  of  increase  in  global  investor  porQolio  into  US  assets  

Same methodology calculated Using IMF, CPIS data

16  

!"#

$"#

%"#

&""#

&&"#

&'"#

&("#

&)"#

*+,-!(#

*+,-!)#

*+,-!.#

*+,-!/#

*+,-!!#

*+,-!$#

*+,-!%#

*+,-$"#

*+,-$&#

*+,-$'#

*+,-$(#

*+,-$)#

*+,-$.#

*+,-$/#

*+,-$!#

*+,-$$#

*+,-$%#

*+,-%"#

*+,-%&#

*+,-%'#

*+,-%(#

*+,-%)#

*+,-%.#

*+,-%/#

*+,-%!#

*+,-%$#

*+,-%%#

*+,-""#

*+,-"&#

*+,-"'#

*+,-"(#

*+,-")#

*+,-".#

*+,-"/#

*+,-"!#

*+,-"$#

*+,-"%#

*+,-&"#

*+,-&&#

!"#$%&'$$#(%)*+","-%."+"(#$%!"-"(/"%0'#(+%%

0123#

4+567#

876+9##

Data: Federal Reserve Board

Implications for the Dollar: Foreign Appetite for Own Appreciation?

Credit Ratings and the Dollar

•  Credit ratings played a role in international asset allocation…. What now?

•  Private portfolio allocation – Plenty of headroom to reallocate toward US assets,

but… maybe no appetite •  Official portfolio allocation

– Own currency appreciation harmful to exports and growth…. but overweight dollars

•  Recipe for dollar volatility