I’m not particularly keen on the current Irish government, but “this”:http://www.irishtimes.com/newspaper/breaking/2009/0331/breaking59.htm seems a bit much:
Ireland may need “new faces in Government”, an analyst with debt ratings agency Standard & Poors said this morning. Frank Gill, speaking a day after the agency lowered Ireland’s credit rating, also said Ireland had a “very low” chance of defaulting on its debt during an interview with Newstalk radio this morning. Mr Gill said a change of Government may be required in an effort to stabilise the debt to gross domestic product ratio. That ratio may rise to above 9.5 per cent, according to the Government, more than three times the European Union limit. Ireland has lost its prized “AAA” credit rating from Standard & Poor’s, which yesterday downgraded its outlook for the Irish economy, blaming the deterioration in public finances. In a move that will make the cost of Government borrowing more expensive and put further pressure on the economy, Standard & Poor’s lowered Ireland’s rating from AAA, the top rating possible, to AA+.
I wouldn’t have thought that this was an especially opportune moment for credit rating agencies to start throwing their weight around given their major contribution to the ongoing crisis, but even in normal times, this would have struck me as serious over-reach. Credit rating agencies are purely private bodies, with an awful lot of political power. In theory, they impartially pronounce upon the perceived riskiness of lending to particular debtors, putting money in particular deals and so on. In practice, their decisions often prove to be quite political. But rarely as political as this. I don’t think that this comment can be interpreted as anything but a statement that Standard and Poor’s willingness to improve Ireland’s credit rating is dependent on the Irish Dail and Irish voters kicking the current government out. That’s a very dubious – and very political – action for a purportedly neutral and technical body to be taking.
Update: Thanks to nnyhav in comments for pointing to this “later story”:http://www.irishtimes.com/newspaper/finance/2009/0401/1224243794208.html.
Reacting to S&P’s decision to cut the Republic’s rating, economists and market analysts yesterday homed in on its concern that there would not be a credible plan for the public finances until after the next election. Mr Gill told The Irish Times that the statement was not meant to question the State’s leadership, and simply reflected the challenge facing the Government and the uncertainty surrounding the banks. He also stressed that a AA+ rating was still broadly positive. “That is a very high rating and this suggests an extremely low probability of default,” he said.
I originally thought that this looked like a walkback rather than a clarification and said as such – then I saw that the Irish Times had changed their original story (without saying that they were doing this) to include the full quote which appears considerably more ambiguous than the original story implied.
Mr Gill said a change of Government may be required in an effort to stabilise the debt to gross domestic product ratio.
“It’s likely that for there to be a buy in into what are going to be inevitable tax hikes in order to stabilise the debt to GDP ratio, you are going to need new faces in the Government. This is typically the case in the aftermath of an economic crisis,” Mr Gill said
The GDP ratio may rise to above 9.5 per cent, according to the Government, more than three times the European Union limit.
{ 13 comments }
Paul Lettan 03.31.09 at 9:48 pm
Perhaps time to take credit ratings away from the private sector and give the responsibility to the World Bank or some other international body. Third world countries have long been aware of this reality.
noname 03.31.09 at 10:00 pm
Obama is running GM, Credit agencies are running the Irish government.
“And I think to myself… What a wonderful world.” :-)
John Quiggin 03.31.09 at 10:28 pm
I’ve had a few goes at this topic in the Australian context. Our State government in Queensland was just re-elected, following a downgrade by Standard & Poors, which would have been unthinkable (at any rate unlikely) not long ago.
http://johnquiggin.com/index.php/archives/2009/02/27/standard-poor/
Here are some tentative suggestions for an alternative, along the lines suggested by Paul
http://johnquiggin.com/index.php/archives/2008/03/08/after-the-ratings-agencies/
Tom Morris 03.31.09 at 10:39 pm
This is the same Standard & Poor’s who said that Lehman Brothers was rated ‘A’ a few days before they filed for bankruptcy. Call me cynical, but I think I’ll take all their future ratings with a big grain of salt, especially since their call is part of the reason that a family member’s “guaranteed growth” bond – an investment sold as extremely safe and put there to safeguard money for tuition fees – now has 20% less money in it than it did a year ago. Thanks guys. These hucksters are the reason I’m very tempted to take every penny out of every bank account and stow it in a shoebox under my damn bed.
BJ Feng 03.31.09 at 11:01 pm
“That ratio may rise to above 9.5 per cent, according to the Government, more than three times the European Union limit.”
Any and all actions can be seen through a political lens if one wishes, but it seems to me that there are legitimate reasons for a downgrade. Furthermore, ratings are largely irrelevant except for regulatory purposes. Any respectable bond manager does his or her own research and ratings follow market yields, not the other way around. Put it in another way, the market almost always has already “downgraded” a bond by demanding higher yields far in advance of any actual downgrade by a ratings agency. GE bonds traded at below AAA ratings for months prior to any downgrade, and Lehman’s bonds were already trading at junk levels when S&P finally decided to downgrade. Even more to the point, the CDO and derivative securities that were rated AAA always had to offer higher yields than “regular” AAA corporate debt, indicating that they were never AAA to begin with.
The mess was caused, in part, due to the way regulations give special treatment to AAA rated securities regardless of how the market perceives them. The power of the ratings agencies come from regulations, they have only marginal influence on market yields and usually follow the yields. Large impacts come from contractual obligations that would put bonds into technical default or subject them to renegotiation should they ever be rated below a certain point. Other than that, the ratings are mostly irrelevant for investors and bond managers. Regulations empower the agencies, it’s all about the regulations.
lemuel pitkin 04.01.09 at 12:31 am
the market almost always has already “downgraded†a bond by demanding higher yields far in advance of any actual downgrade by a ratings agency. GE bonds traded at below AAA ratings for months prior to any downgrade, and Lehman’s bonds were already trading at junk levels when S&P finally decided to downgrade. Even more to the point, the CDO and derivative securities that were rated AAA always had to offer higher yields than “regular†AAA corporate debt, indicating that they were never AAA to begin with.
This is probably right as far as corporate and government securities go, but the argument most people make about the rating agencies and the real estate bubble is because it was much harder, even impossible, to independently asses the risk characteristics of the various mortgage-back securities, investors were far more dependent on the rating agencies than in other cases. So the general view seems to be that they played an independent role in the housing boom and bust, regardless of a regulation.
Good discussion in this paper.
nnyhav 04.01.09 at 3:06 am
Same paper, hours later. Sound-bites don’t make for sound analysis.
Nur al-Cubicle 04.01.09 at 3:23 pm
The rating agencies are some sort of lobby. I remember them playing a crucial role in removing the Prodi goverment in Italy. Notice that now that Berlusconi is in power, there is not one peep from the raters.
Stuart 04.01.09 at 5:38 pm
As news becomes more online, wouldn’t it be useful if journalists might take to uploading transcripts of all the interviews they do and link to them in the articles they create – this would seem to make them far more credible as if a statement seems odd then it gives access to the complete context of the statement (or as complete as can be reasonably achieved anyway). How you would persuade them to do so is another question.
jonp72 04.01.09 at 6:25 pm
Didn’t the bond rating agencies also play a role in the downfall of Dennis Kucinich as mayor of Cinncinnati?
glenn 04.02.09 at 11:21 am
They were the reason for the fall of the Romans.
Look, Tom. Let’s be honest, they make mistakes, but by and large, their ratings have worked for years. Investment grade ratings fail much less than junk. And AAA, least of all. They get criticized for being late to change ratings, and they get criticized for changing ratings too much, as a rating change itself can cause fundamentals to change. Damned if you do, damned if you dont’. I certainly don’t like the fact they hide behind the fact that their ratings are ‘just opinions’ but clearly waaaay too many investors use a bond rating as the ONLY analytical source., and then they are not willing to admit to not doing their bit, their own homework. And most investors I know still value alot of their work and can set aside the structured products debacle. That’s a very separate business; nearly everyone (they included) got that wrong.
John Quiggin 04.02.09 at 11:25 am
BJF is right. The big problem is that governments have outsourced regulation to these guys. If corporations want to pay for the S&P seal of approval for their toxic junk, I have no problem with that, but when municipalities are forced to buy “insurance” from companies like MBIA because, as a corporate, MBIA gets an AAA rating despite being less creditworthy than the average Indian village, there is a problem.
Tangurena 04.03.09 at 2:19 am
The mess was caused, in part, due to the way regulations give special treatment to AAA rated securities regardless of how the market perceives them
Many sorts of organizations are required to only invest in AAA rated instruments. Consequently, the market for AAA is about 10 times that of AA. The CDO issuers bullied or bribed the rating agencies to whitewash everything with AAA ratings.
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