The numbers behind the ratings
How do you rate sovereign creditworthiness?
BRITAIN lost the top credit rating from Moody’s on February 22nd, but Standard Poor’s and Fitch, the two other main ratings agencies, have yet to make the same move. As the table below shows, the firms often have different ratings for the same country; France still gets top marks from Fitch but not from the other two. The assessment of a country’s creditworthiness is an art, not a science; a government’s willingness to pay may be just as important as its ability to do so. It is not hard to see why Australia, with a debt-to-GDP ratio of 27.1% and a small current deficit, is rated triple-A by all three agencies. But Japan, with debt of 237% of GDP, and a huge current deficit is rated more highly than Turkey. It is partly down to a country’s history of meeting its obligations and partly down to the nature of its creditors; almost all of Japan’s government debt is owned by its own citizens.
Martha, Ireland is an excellent example of a crisis largely, if not wholly, caused by the ratings agencies. What actually changed in the Irish economy to precipitate the crisis? Nothing! The ratings agencies are mostly US-based, so subject to US regulation. Some might say that ‘US regulation’ is a bit like ‘military intelligence,’ an oxymoron. It’s certainly proof that Adam Smith was wrong (yes, I’m calling it) in that unregulated or under=regulated markets are not self-correcting, they veer away from pure capitalism towards oligopoly.
So what actually caused Ireland’s woes, and those of the rest of the world, was a scam on the part of under-regulated US banks and lending institutions to offload their mountains of bad debt (which they always knew was bad, and which was entirely their own fault) to foreign countries, their banks, superannuation funds, even local authorities. The ratings agencies were complicit in this scam to such an extent that they have already been successfully sued by some irate investors. They enthusiastically sold what, if they were even halfway competent, they must have known was bad debt, rated AAA. Once it all fell apart, the same agencies then turned to the same foreign banks they’d been selling sub-prime derivatives to the day before, and said, “Oh, you’ve been badly advised. You’ve bought far too much of our shit, we’re going to have to downgrade you.” So of course not only are they now holding mountains of bad debt, but because of the downgrade they are also paying higher interest on all of their borrowings. So the banks run to their own governments, tails between their legs, looking for a bailout. So govts bail out the banks, borrowing to do so, because allowing them to collapse is unthinkable, whereupon the ratings agencies then proceed to downgrade those countries. They then demand those countries implement austerity policies, under threat of further downgrades.
So where are we up to? Well, US banks, inadequately regulated, have decided on perpetrating a scam by lending lots of money to people they know can’t afford to repay it. But that’s ok, because they re-package and offload that bad debt to other institutions, in other countries, before they default. The foreign banks and institutions offload it to their govts, who are then forced, by the same agencies, to offload it onto taxpayers. Now the problem is that austerity doesn’t work, because for every dollar you cut you lose a dollar (if not more) in revenue. So the effect these agencies are having on the real world economy is that of a reverse multiplier, a divider effect if you will.
Now this may sound far-fetched to some, but did you hear how the guy from the ratings agency explained the UK decision? He said that although they approved of the government’s austerity policies, they were predicting several years of sluggish growth, which explained the downgrade. What do they think is causing the sluggish growth. Pack of brainless numpties!