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What is Credit Rating: meaning and why it’s so important

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Rating (def.) is a synthetic evalutation made by an external independent subject, on the ability and will of a borrower, to face the payment of the capital and interests, related to an emission of debt securities, placed or to be placed, as stated in the contractual obligation.

To be more simple it consists of an alphanumerical symbol that can be easily understood and interpreted by anyone, and it’s useful because with just a letter or a number you can compare different emission with ease.

But probably you are wondering why rating and rating agencies wear such an important role in markets, and why their decision can influence investors so much.

That’s simple.. Rating is a very important cognitive element in determination of  the interest rate payed by the borrower. The interest rate is in fact composed by 2 elements:

  • the benchmark (fixed): that is the distinctive rate for securities with the same duration and structure, and express the needs of units in deficit (borrowers).
  • spread (variable): that express the needs of units in surplus (investors), and changes based on the perception of risk of the issuer.
So, the lower the rating is the higher is the spread the issuer must pay to the investors.
Rating is also useful because it determines if a security is of investment grade or non investment grade (speculative), and this distinction is important too because some subjects, for example pension funds, cannot invest in a financial instrument that’s not of investment grade.
For a slightly clear view of this distinction check the table below.
"Rating Score Table"

What is Quantitative Easing

There’re a lot of talks about quantitative easing in this period, both from the ECB than from the FED. For those of you who doesn’t know what the news are talking about here is a short and clear video that explains the maneuver.

Basically this is done to lower the interests ratios, but too much of it could cause inflation, and that’s what the ECB prefers not to do, a high inflation indeed could cause even a worse scenario of the actual one. And that is why the ECB said that this measure could not be considered as a long-term solution to the problems of Europe and Italy in particular.

Italian government and Italy need to do something more structural to enforce the growth of the country and sanitize the balance.

the Cloud

Cloud and virtualization are two topics that are really exploding, they are really interesting both for developers and companies because they can make you build a solid and efficient infrastructure, that meets your needs and it’s more importantly cost effective because of the scalability of these two services.

I will go deeper in these the next time as I’m planning to do some four-hands posts. There’s a lot to say about it and I will try to focus on the economic and more “management side” of it, that few underlines, leaving the technical advices to my dear friend Mirko. By now I leave here a video as a brief introduction to the cloud, and a slideshare presentation made by Simone Brunozzi (AWS Technology Evangelist) for the more techies of you.

Architecting for the Cloud: demo and best practices, by Simone Brunozzi