Brazil’s Credit Rating and the US inflation problem
In 1989 Moody’s downgraded Brazil to BB- without a reasonable justification, causing great problems and strife to the Brazilian citizen and government.
Moody’s and S&P, and most Americans, have yet to understand the concept of Real Interest rates, rather than Nominal Interest rates, which is a misleading pricing method. It misleads investors into believing that they are receiving significantly more "interest" than they really are. In Brazil that would be a false advertising.
During the last twenty years, Brazil always had the ability to pay the Real Interest rate of its obligations, plus an extra for amortization. It never deserved the rating of "questionable ability to pay".
Now a Brazilian Rating Agency has used the reason against the US Treasuries. Because they are not indexed to inflation "there is a questionable doubt that investor’s will receive the true value of their investment, because of future US inflation".
For 30 year treasuries, where a 4% inflation will erode principal by 50% at least, a double CC would have been more appropriate. But that would have seemed adding insult onto injury.
But it is about time the American investors realize that Nominal Interest Rates is a form of false advertising, wrong pricing model, since part of that interest is inflation, not interest. And inflation is not income by any means.
That is one the reason’s of the sub-prime crisis. Forcing poor people to pay "inflated interest rates" in the beginning of their life cycle, and paying totally eroded principal 30 years down the line.
Meanwhile inflation in Brazil is under control and the country today has the highest real interest rate in the world which makes it a very interesting investment in bonds in fixed income.
