Brazil’s Credit Rating and the US inflation problem
In 1989 Moody’s changed the credit rating of Brazil to BB- unjustly, causing enormous suffering and strife to the Brazilian citizen and government.
Moody’s and S&P, and most Americans, have yet to realize the concept of Real Interest rates, rather than Nominal Interest rates, which is a misleading pricing scheme. It misleads people into thinking that they are receiving much more "interest" than they really are. In Brazil that would be a violation of the law.
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 justified the rating of "questionable ability to pay".
Now a Brazilian Rating Agency has used the reason against the US Treasuries. Since they are not indexed to inflation "there is a questionable doubt that investor’s will receive the true value of their investment, due to 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 justified. But that would have seemed overreacting.
But it is about time the American investors realize that Nominal Interest Rates is a form of false advertising, bad pricing model, because 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 Brazil today has the highest real interest rate in the world which makes it a very interesting investment in bonds in and high yield bonds.