Jittery markets: Who is to blame?

Ratings provided by a reputed agency are coming under global scrutiny, after it downgraded the USA in what is being perceived as a biased move

BY NOEL G DE SOUZA

On several occasions, this writer has criticised the ratings provided by, amongst others, the World Economic Forum and some UN agencies for their unjustifiably low evaluation of India. These agencies have habitually given the Scandinavian and North European countries, Australia, New Zealand and the USA high rankings.

Now that Standard & Poor’s (S&P), a premier financial ratings agency, has done the unthinkable, that is, downgraded the USA by one notch, all hell has broken loose. Markets have got jittery and the financial turmoil pervading Europe has worsened. Incidentally, Indian-American Deven Sharma, a native of Jharkhand, was till very recently the President of S&P. He suddenly resigned last month.

S&P, attempting to justify its American downgrading, stated that it had reduced the rating of the USA from AAA to AA+ because “the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilise the government’s mediumterm debt dynamics.”

It goes on to criticise the recent wrangle within the American Congress saying that “the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges …”

The S&P downgrade of USA’s rating has been criticised as being blatantly political, and not economic. Prior to making the downgrade, American Treasury officials had pointed out to S&P, that the agency had overestimated the US deficit by an astonishing two trillion US dollars. The error was subsequently rectified, though S&P persisted in the downgrade by changing its reasoning.

Gene Sperling, who heads the White House Council of Economic Advisers, has attacked the flawed reasoning behind the downgrade. Warren Buffet, America’s most successful investor, has laughed off the S&P downgrade saying that he would give the USA a quadruple-A rating if such existed.

This is not the first time that S&P has been in contention. In 2009, the European Commission charged S&P with abusing its position as the sole provider of international securities codes for US securities by making European companies to pay licensing fees for their use. It declared such practice to be illegal. The U.S. Justice Department is now investigating S&P over its actions on mortgages which lead to the 2008-2009 economic crisis.

If the S&P downgrade of USA to an AA+ is justified now, then why was it not issued some five years ago when similar conditions existed? At that time it gave AAA’s to not only the USA but to such financial lending institutions like Freddy May. If it had warned investors then, the Global Financial Crisis of 2008 might have been prevented or reduced. Instead, depending on such favourable ratings, foreign investors flocked to buy investments from the likes of Lehmann Brothers and others. These include several Australian municipalities and other institutions such as churches.

In a Keynote Speech (Asia’s Growing Investors: Agents of Change) by the now outgoing S&P President Deven Sharma in May this year, he said that “developed economies of the US, Europe and Japan are facing difficult years ahead to revitalise growth, while rising economies are driving the world’s economic growth and they themselves are facing their own shifts, be it China, India or Brazil. Other emerging economies like Indonesia, Peru and Turkey are experiencing faster growth and face fundamental changes as well.”

However, S&P’s ratings do not at all reflect the thrust of Sharma’s speech concerning India. India is rated BBB- which is identical to that of Croatia, Iceland, Morocco, Portugal and Romania, even though Iceland and Portugal are front-line examples of Europe’s economic malaise.

S&P’s evaluation has ignored several facets about India such as that the country has become a formidable industrial nation, is an important regional military power and that it is creditworthy and able to repay its debts without any outside help. Besides, India ranks within the USA’s top 15 creditors holding $41 billion of US debt. That Poland, which is an aid-seeking nation, can get a ranking of A+ without the positive qualities that India possesses strongly suggests that S&P may have one rule for Europe and another for Asia.

Italy has taken strong steps to avoid becoming Europe’s next domino to fall into crisis by substantially increasing taxes on its rich, as has been the norm till now. Warren Buffet has called on the USA to raise taxes on the rich such as on himself. He points out that he pays a lesser rate of tax than does his cleaner. That is the current problem in the USA. The American Congress includes members who want to keep on reducing taxes for the very rich whilst increasing taxes for low income earners.

The days of unquestioning acceptance of credit worthiness by ratings agencies are hopefully over and the agencies themselves are rightly under scrutiny.

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