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Archive for January 10th, 2010

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The ratings agency is actually considering quantifying a people’s willingness to continue being abused by their governments. Once Moody’s rated “social cohesion,” it could be securitized, which means someone could conceivably make money from a revolution. Not that that would be unprecedented. Central banks have long made money by lending to belligerents.

In recent months, some of the brightest minds at Moody’s rating agency have been mulling a fascinating question: should they introduce a formal rating of “social cohesion” into sovereign debt indices, when they judge whether a government is likely to default on its debt – or not?

So far, neither Moody’s (nor any other agency) has actually done this, after all it is pretty hard to feed a specific “cohesion” number into any model.

But the discussion points to a fundamental issue that will hang over bond markets this decade.

In the past few years, when markets have tried to judge the risk attached to western government bonds, they have typically done so looking at hard macro-economic data, such as projected gross domestic product. And such data, of course, continue to be critically important, given the current size of the western fiscal hole.

But what is also becoming clear now is that hard numbers alone do not tell the entire tale. What will be equally crucial in the coming years is not the sheer scale of debt, but whether governments can implement a rational and effective way of cutting it – and potentially allocating pain – without unleashing (at best) political instability, or (at worst) full blown revolution.

Read more at The Financial Times.

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