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