IN THE UPCOMING SOVEREIGN DEBT CRISIS, WILL SOVEREIGN RATINGS BE OF ASSISTANCE?
We fully subscribe to your view that indeed, as you write, ???bankruptcy???s spectre no longer haunts just poor nations???.
More than ever investors need tools to differentiate between creditworthy sovereign borrowers and others.
they should be able to rely on credit rating agencies (CRAs) to assist them in this respect.
But can we trust the main CRAs?
The subprime debacle has shown how they assigned inflated investment grade ratings to what they knew were toxic products in order to increase revenue. And unfortunately, as illustrated below, two instances provide clear and irrefutable proof that they act no differently when rating sovereign issuers.
As quoted from Moody???s published rating methodology:
???Any credit analysis must take into account not only a debtor's ability -- but also its willingness -- to repay. Determining a country's ability to repay is in the end not a very difficult task. (...) The real question is -- what level of resource mobilization are governments willing to undertake in order to repay their debts? In the end, willingness to repay is the key to sovereign credit analysis.??? (Source: "Moody's rating methodologies", 09.08.08)
Yet Moody???s assign investment grade ratings to both the Russian Federation and the People???s Republic of China, two states which have consistently flouted the successor government doctrine of settled international law by actively avoiding repayment obligations to hundreds of thousands of private investors worldwide.
Would you ever dare say that these states are ???willing to pay???, as their investment grade ratings imply?
Yet that is what the CRAs are doing.
And they have a strong motive for doing so, since by virtue of the sovereign ceiling rule, assigning the deserved default ratings to Russia and China would automatically result in depriving the CRAs of the entire rating revenue stream from any private or public issuer of those countries.
So, how can we trust any sovereign rating, since CRAs indiscriminately assign investment grades to bona fide sovereigns who make all payments in full and on time on the one hand and rogue states who actively evade repayment obligations on the other?
Until CRAs are liable for the effects of assigning knowingly false ratings, as Sen. Jack Reed???s recently introduced bill suggests, there is no way we can actually trust sovereign ratings.
By focusing on the rating process of structured products, legislators are fixing the previous crisis, not the next - which as your article makes clear lies within state budgets and policies.
Please see the following press release at:
http://sovereignratings.350894.free-press-release.com/
or at:
http://www.free-press-release.com/news/200904/1238858218.html
(more reader-friendly)
or at:
http://www.archive-host.com/compteur.php?url=http://sd-1.archive-host.com/membres/up/203786733364141878/G20PREN.doc
(with active links)
Yours truly,
He
Forgive Us Our Debts
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Public debt is rising at its fastest rate since World War II, as nearly all major governments seek to stimulate their shaky economies. Who's most at risk from the ballooning debt bubble? It's an important question, since countries that struggle to service their debt will pay more to borrow and be forced to slash spending on everything from health care to education. (Already, there's been a slew of sovereign downgrades worldwide. Bankruptcy's specter no longer haunts just poor nations.)
Size matters when it comes to debt, but it's not the only factor—or even the most important one. Japan, for example, has long carried the highest gross debt to GDP ratio of any major economy (IMF 2009 estimates put it at a whopping 217 percent), and it will continue to do so in the years ahead. Yet the bulk of Japanese debt is owned by the country's pensioners—which makes it an internal problem, one that will likely continue to result in slow stagnation rather than a major economic upheaval. EU nations like Italy (109 percent), Germany (76 percent) and France (72 percent) also carry large debt loads, but have for some time. For them, high debt is status quo, and while it's not good for their longer-term economic prospects, their politics and institutions are designed to cope with it.
More problematic are the U.S. and the U.K., where relatively low debt loads are rapidly rising thanks to the financial crisis. U.S. debt now stands at 81 percent of GDP; Britain's is 61 percent. But the U.K.'s debt has been increasing faster than that of any other big nation, rich or poor—between 2006 and 2010, Britain's gross debt will have grown by nearly 59 percent. "The U.K.'s fiscal position wasn't great even before the crisis," says Holger Schmieding, head of European economics for Bank of AmericaMerrill Lynch. "It's going to have big trouble adjusting to and servicing the new debt levels, especially as interest rates begin to rise." Already, Standard & Poor's downgraded its outlook for British sovereign debt from "stable" to "negative." The U.S. is at risk, too, but demographics will help. "The best way to lower debt is to grow," says AXA chief economist Eric Chaney, and a younger population will continue to result in higher growth rates in America relative to European countries.
Ultimately, all these nations will have to rein in debt to avoid a downgrade or even default, but so far, only Germany has been laying the political groundwork. The German parliament recently passed a law requiring balanced budgets by 2016. While pulling it off may require an entirely new economic model, other countries should take heed: the money rolling off central-bank presses today could carry a very high price tomorrow.
© 2009
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