I enjoy the writings of Gillian Tett of the Financial Times for a very good reason. In contrast to the usual mindless econo-blather you get from financial journalists and the economists they cover, she is a social anthropologist. Unlike the neat and tidy world of neoclassical economics, processes of trade and exchange have a life of their own bound with messier stuff--seven deadly sins, cognitive limitations, emotional frailties, and so forth. Today, she offers an interesting spin on the notion that a country cannot go bankrupt.A few years ago I had the displeasure of reading the sophomoric When Corporations Rule the World by David Korten. Supposedly offering an "insider" critique with his PhD from Stanford Business School, it was riddled with amateur nite errors alike comparing corporate revenues with national GDP. Nevertheless, as credit rating agencies belatedly become more fully aware of the dire fiscal situations of any number of industrialized countries, we are faced with a new reality: firms, not countries are safer credit bets. Not only are the former better able to control pensions and other costs, but their footloose nature allows them to go where the money is in a way that nations can't. For, the latter are pretty much stuck with the territory and people they have.
So while corporations may not necessarily "rule" the world in being larger economic entities than countries or in being able to engineer electoral processes worldwide, we may now be able to make a smaller claim: That blue chip, internationally diversified corporations are safer bets than basket cases alike the United States of America. Tett writes:
At the end of last week, trading in the credit derivatives markets [as a proxy for default risk] implied that no less than 70 large US companies are now considered a better credit bet than the American government, according to Markit data. More specifically, the cost of insuring US government bonds against default for five years is currently trading around 50 basis points (meaning it costs $50,000 a year to insure against default for $10m of bonds), while the cost is less than 30bp for companies such as AT&T, New Cingular Wireless and Oracle. The spread for Google, HP, Coca Cola – and, yes, McDonald’s – is also well below the sovereign spread.While the West saddles their central banks' balance sheets with assets of dubious worth--think of the Federal Reserve's arsenal of mortgage-backed securities or the ECB's purchases of Greek and Portugese sovereign debt--the best-run firms have healthy cash flows and lots of money to burn:
And if you dig into the reasons why those CDS rankings have changed – or why S&P left those four American companies rated above the government – it reveals some fascinating longer-term structural shifts. One way to read this trend is that it presents a verdict on relative levels of corporate governance, and transparency. More specifically, the reason why so many large companies command tight CDS spreads is that investors feel confident that they understand their balance sheets, and that these entities have plenty of cash on hand, and tangible, easily tracked revenues.An important point that I'll get to in the near future is that, as the above begins to hint at, successful American firms do not necessarily benefit America itself as a consequence of the modern nature of globalization and innovation. In other words, what may have been good for GM may have been good for America in the Fifties--but what's good for Google now may not be good for contemporary America. More on this later, but let's just say for now that corporate issues being perceived as safer than sovereign ones may increasingly become the norm and not the exception in short order.
Sadly, however, many public entities currently lack that sense of transparency; on the contrary, it is painfully hard to disentangle where the liabilities and tangible assets lie. Hence the high(ish) level of CDS spreads for US Treasuries: although investors know that America is highly unlikely to default on its bonds, the political climate is so volatile that it is hard to predict cash flows. However, a second factor is the issue of globalisation. Most of America’s best-run and healthiest companies these days are not really “American” anymore; on the contrary, they draw a growing proportion of their revenues from outside America’s shores, and hold vast pots of cash overseas.
That gives them the ability to hedge themselves against an American, or Western, economic downturn; or, to put it another way, they can flee, with their cash if economic or political circumstances turn sour. So can many “European” companies; just look, for example, at the global nature of “Greek” shipping lines, or those “Irish” information technology groups. However, that option is not open to public sector entities; for better or worse, their credit risk is tethered to the West.
