by John Ward
Whenever some financially illiterate politician wants to make a spurious point look valid, he or she will turn to the world’s credit-rating agencies as if they might be fully paid-up members of the Delphic Oracle Club. The truth is that they will say whatever the highest bidder wants them to say.
Some years back, I signed up to an alert for any Standard & Poors press releases about the financial viability of Sovereign States. It must’ve been a slow afternoon, or perhaps I was a bit pissed at the time; but either way, I’m glad I did this because the S&P “outlook” statements are an endless source of fun for all the family, and guaranteed to break the ice at supper parties.
Today’s output included these two corkers:
Ratings On The United Kingdom Affirmed At ‘AA/A-1+’; Outlook Remains Negative
Italy’s Ratings Affirmed At ‘BBB/A-2’; Outlook Stable
Had I been given at school the rating AA/A-1+, I would have been (while somewhat baffled by two A’s and a third + or – A ) pretty chipper about the way things were going. I really don’t know what I’d have done if the headmaster had scrawled on my Report ‘Outlook remains negative’: here’s a chap who gets straight A’s in everything except Zen metalwork, and yet somehow shows signs of being a potential drain on civilisation in later life.
Meanwhile, down in the ‘BBB/A-2’ stream, Italy Minor seems mired in mediocrity and unable to get beyond the occasional A-2 in his studies. He has, on the whole, little to recommend him – beyond a vague connection with his course in machiavellian brio and a minor-league culinary talent. But his Outlook is stable.
What can this mean? He is going to be a stable boy and (if he starves himself enough) one day move to England in order to become Frankie Dettori perhaps?
Drilling down into S&P’s analysis, two assertions caused me to momentarily lose bladder control:
- In relation to the UK, ‘uncertainty surrounds its relationship with its most important trading partner the EU’; and ‘the UK has one of the biggest current account trading deficits in the world’. (No attempt made here to note the 100% correlation between the two factors)
- In relation to Italy, ‘Rising private sector investment and employment are driving Italy’s economic recovery’; and ‘we believe that this year’s budget deficit will amount to about 1.9% of GDP, which would set Italy’s very high government debt to GDP ratio on a declining path’. (No mention of a recent election that returned a clear majority of anti-EU candidates and resulted in further stalemate. No mention of the debt-to-gdp-ratio, which currently stands at 132%)
Just so we’re clear about all this, according to S&P, Britain is breaking its ties to a disastrous financial relationship that has contributed to a massive trade deficit….and so naturally, its outlook is terrifyingly ghastly. But Italy’s plucky attempt to keep its deficit down to 1.9% must surely mean that – if it keeps this up – the overall debt will fall.
Mathematics has moved on considerably since I was Ward of 5A struggling with quadratic equations. But even my very doubtful maths teacher Mr Hanaby would have been bound to agree that you don’t make a debt fall by spending an increasingly little bit more than you have available each year.
The simple observation here is not that hard to grasp: S&P is being rude about Britain because it wants to leave the EU; and its being inordinately kind to Italy because it has not, as yet, signalled its desire to do the same.
And on that basis, Standard & Poors stands accused of being biased (and bought) in the judgements it proffers.
Is such a view justified?
As long ago as 2011, McGraw-Hill – which owns S&P – pointed out that global regulators “have been reviewing the role of rating agencies and their processes and the need for greater oversight or regulations concerning the issuance of credit ratings.”
The basic problem for the ratings agencies is that they get paid by the people they rate. This is akin to reporting on corruption in internaional football while relying solely on Sepp Blatter for your income. It is, obviously, potty.
The Credit Ratings Reform Act of 2006 was supposed to increase surveillance of the ratings agencies, but it didn’t stop these agencies from giving high scores to mortgage debt when that debt deserved to be seen as junk.
In a bizarre development during 2013, Standard & Poor’s responded in a US federal court to a $5 billion U.S. government civil fraud lawsuit by saying that S&P’s own claims to have objective credit ratings, not corrupted by conflicts of interest, were “mere puffery” and not to be trusted.
Listen: when you’re desperate, any defence will do.
During 2016, The Australian government used warnings from Standard & Poor’s that placed Australia on a negative watch during the general election to state that S&P had “no technical authority to make such a warning”. The government had a point: ratings agencies were instrumental in bringing about the global financial crisis, but have survived because of a lack of political will to reform them.
The reputation of the credit rating agencies was tarnished not only by the global financial crisis but, before that, by the Enron scandal, the Asian financial crisis and the financial collapse of New York City in the mid-1970s. The agencies’ track record shows a consistent failure to detect near-defaults, defaults and financial disasters, as well as failure to downgrade troubled firms until just before (or even after) declarations of bankruptcy.
So here is my advice for a cold, damp and grey European night to anyone swayed by opportunistic quoting by politicians of Standard & Poors ratings…or indeed any other similar agency: don’t bet the farm on anything they say. They are part of the system, and heavily implicated in its wrongdoings.