The same applies to US bonds as well (though I wouldn’t say “plummeted”).
US government is still considered the safest investment in the world - notwithstanding recent threats by the credit rating agencies - and increased perceived risk in other investment areas prompts a “flight to safety” that lowers the yields on treasuries.
Enron was never close to a AAA rated credit. Their S&P rating was BBB from 1995 through November 2001. This is one level above junk rated status. They were downgraded in October 2001 to having a negative outlook. IN late November they were downgraded to B. The same was basically the case with Moody’s. Enron never had a better than Baa rating with Moody’s.
The biggest problem with these credit ratings as it relates to default predictability is that they are slow to react. That is why Moody’s, for example, hypes their Moody’s KMV ratings. These ratings are more formula driven. I dislike much about them, but they at least do react much quicker.
Another problem with the credit ratings is that they are relying on company prepared information as well as third party provided information. Since Enron was providing misleading information and the audited financial statements (remember Aurthur Anderson ceased to exist after Enron) were unreliable then the credit rating agencies were using poor data. The saying is “garbage in, garbage out.”
Perhaps. But it’s odd nonetheless. The idea of a credit rating is supposed to be to assess the risk of bankruptcy. In this case, the rating agencies themselves (proximately) caused the bankruptcy, making their downgrade a self-fulfilling prophecy.
It’s possible that were it not for the downgrades at the time, that Enron would still be around. Because they were a profitable company (though not nearly as profitable as they were pretending to be) and had they had more time to weather the storm, they might have survived.
This really isn’t true. You make it sound like all they needed was some minor debt relief. Plenty of companies have gone through bankruptcy restructuring and come out the other side (GM and Chrysler for a couple of large recent examples). Further, Enron received a $1.5 billion DIP financing during bankruptcy. Their problems were systemic. They stupidly shed many of their best hard assets in the years prior to their collapse (EOG, for example). Don’t get me wrong, there was a business there, but it isn’t the credit rating agencies that took them down. They had rampant fraud and serious liquidity issues throughout their exceedingly complex web of a company. The equity holders were toast no matter what, but a reorganized form of the company could have come out of bankruptcy if their problems weren’t so severe.
To see the effect on already issued bonds here’s a chart from Bloomberg showing the yield for [“Ireland Government Bonds 10 Year Note Generic Bid Yield”](Ireland Government Bonds 10 Year Note Generic Bid Yield). I think this shows the effective interest rate you would get if you purchased a 10 year Irish bond today (so it’s the inverse of the price).*
You can see the jump on the graph. At the time of the downgrade the yield was around 11.5%, it’s now up to around 14%.
*This is not the interest rate the Irish government pays to the holders of the bonds directly. That is set when the bond is issued - for example theres a 5.00 per cent Irish bond that matures in 2020). However that 5 per cent is paid on the face value of the bond. The yield shows the effective interest rate at the current price of the bond. These 2020 bonds currently cost 54.620 euros. So you could pick up a 100 euro bond for 54.620 and be entitled to receive 5 euros a year for it (5% of the face value). (I know this doesn’t add up to 14% - its more like 9.1% but remember this is one particular bond and the Bloomberg graph is for an index).
I don’t remember the precise details after the years, but my recollection is otherwise.
As I recall it, Enron’s problem was that no one knew what their true financial status was, because everyone lost confidence in their financial reporting. As a result, no one would risk lending them money. (DIP financing is not a comparison for this purpose.)
But if they would have had more time, they could have had another outside firm go through their books and determine their true status. Which might have resulted in their stock being worth $20 a share versus $100. But it would have been a positive. And if they brought in some people untainted by the previous shananigans, they might have eventually gotted refinanced.
But there was no way anyone was going to lend them new money at the time, with the current administration still in place and so much uncertainty about their books. So once the need for immediate financing was triggered by the ratings agencies, they were toast.
I’m sort of regretting (very inaccurately) bringing Enron up as an example in the first place now - sorry OP.
I think Fotheringay-Phipps and LonghornDave discussion on Enron is very interesting however. I think it boils down to whether the bond downgrade was a major cause of the collapse or simply an indicator that the collapse was already underway. Either way, the ratings agencies downgrade was so late that it didn’t help ordinary investors.
Then the statement that people came to Ireland because of the lower tax rate is incorrect. That was the point of my statement. Heck, if there are already some that are lower, then it really makes it incorrect.
The U.S. has the highest corporate tax rate in the world, and we have more businesses and our touted as being more business-friendly, or at least we were until the downturn.
My point is that people make too much out of the tax thing. It alone is not enough to say anything. The Irish government ought to be able to afford at least a small increase.
Ireland’s foreign investment boom occurred mostly in the early 90s. Other countries took note and cut their corporate rates to see if they could attract similar investment. We’re not talking about something that happened yesterday.
It should be obvious that this isn’t some kind of on/off switch. IBM is not going to move an $800 million assembly plant in order to save $8 million a year in tax payments. It might not even do it to save $80 million a year in tax payments if it means moving to a country with a less educated and/or less English-proficient workforce.
For now, Ireland’s is still the lowest among comparable countries.
The US doesn’t have the highest corporate tax rate in the world. Japan does. However, the US rate is highly misleading; we exempt all kinds of transfers that other countries don’t. For wholly US-based corporations, the effective rate is closer to 20%. For those with significant offshore operations, it can be as low as 0%.
You are correct to suggest that Ireland can afford an increase, of course. The question is, how much?
Enron’s problem was that they perpetuated a gigantic fraud. They set up “special purpose vehicles” off the balance sheet. Basically they were able to “show the profits and hide the debts/costs.” Their share price was zero (should have been negative) based on the true books.
Before the crash, the government’s economic think tank suggested that the rate could be raised from 12.5% to 17.5% with no loss of competitiveness. But there was never any serious consideration of raising it then and there certainly wouldn’t be now. The corporation tax seems to be one of the few sacred cows left in Ireland.
In addition to the low ongoing rate, IIRC in the early-mid '90s Ireland also offered a corporate tax holiday for a few years to incoming foreign tech companies provided they consistently employed 16 or more residents. This is absolutely what prompted the US company I worked for to set their nominal headquarters up in Dublin, even though the senior management were based in the US.
There’s absolutely no way that the low taxation rate can be dismissed as a major contributor to the Celtic Tiger, for good or bad.
ETA: here’s an article about corporate tax jiggery pokery in Ireland, with reference to Google.