Sunday, January 25, 2009

Is That A Standard Rating Or Just A Poor One?

Spain’s international credit rating got downgraded the other day by the Standard and Poor ratings agency. The rating has only fallen from the top level “triple A” to the still superior AA+, but it does mean that the Spanish government may have to pay a bit more to finance its debt. They are strange things, these ratings, and I’ve never paid much attention to them given that I don’t have one. Nevertheless it’s curious that a country’s ability to obtain credit can be changed overnight on the say so of one of a handful of private companies that issue these judgements. S&P seem to have based their judgement on Spain’s deficit and on some unspecified “structural” problems that presumably haven’t just appeared in the last week or two. Such statements are normally code for sacking people and given the numbers being made unemployed at the moment in Spain you would have thought the country was doing very well by such criteria. It all raises the question of who rates the raters? One person who doesn’t rate them very highly is Paul de Grauwe who has written on the issue in that well known Marxist pamphlet, the Financial Times. These are some of the choice quotes from his article:

“Is S&P still in the business of producing risk analyses? Should the rating agencies not have gone out of business after they told us for years that the risk associated with the ballooning debt of banks and large companies was nothing to worry about? How can these agencies, which were systematically wrong in the past, have any credibility in whatever risk analysis they make?”

“Government debt in the eurozone has declined steadily since 2000 (from 69 per cent of gross domestic product in 2000 to 66 per cent in 2007). The government debt of Greece, Ireland and Spain has declined even faster than in the eurozone as a whole. Two of them, Ireland and Spain, had a level of government debt that was about half the German and US levels in 2007. True, since the eruption of the crisis, government debt in these countries has been increasing fast. But US and UK government debt is rising equally fast. No warnings have been issued against the US and the UK."

"We are all subject to biased beliefs. The problem arises when such beliefs affect the analysis of rating agencies, which have considerable power in moving markets and in rewarding some and punishing others. The rewards and punishments distributed by rating agencies have huge implications. "

On the other hand, perhaps the FT has turned Marxist. In the El País economy section today they quote a "moderate" FT analyst on the UK economy who suggests that shooting the bankers and nationalising their assets may not just attract public support but it may even help to get the economy out of its current mess. I’ll have to start reading it more often.

1 comment:

Tom said...

Actually, the FT has some really good writing on Spain from time to time (well, better than the Economist or pretty much anything except the Guardian).

It would probably be a good idea for more Marxists to read the FT.