Why are the ratings agencies still in business?
(Money Watch) COMMENTARY The big three credit ratings agencies - Standard and Poor's, Moody's and Fitch - have been having a tough time of late. And by "of late" I mean since the turn of the century. The agencies have one primary job to do: Letting investors know how likely it is that a security (or similar) is going to pay off as promised. Unfortunately, they are becoming uncannily good at getting this exactly wrong. The most recent example: Greece.
Wednesday S&P raised the rating on Greek bonds& from really, really, really bad to merely very, very bad. This news impressed investors so much that Greek bond rates increased, meaning Athens now has to pay more to borrow money than it did when its credit score was worse. Now, to be fair, it didn't go up a lot. The 10-year bonds opened Wednesday at 20.31 and closed at 20.43. However, it is notable because this in keeping with previous market reactions. When the agencies cut the U.S.'s credit rating, our borrowing costs went down.
It is difficult to see any particular reason why Greece deserves a better rating. It is no less bankrupt today than it was yesterday or even a year ago. S&P, however, says the Greeks deserved a better rating because they completed the biggest sovereign debt restructuring in financial history, thus meaning they are no longer in the most technical sense "in default."
To place its financial position on a sustainable footing, the government has been implementing a significant deficit reduction strategy in the context of the extended IMF Stand-By Arrangement, with substantial financial support from members of the European Economic and Monetary Union. Besides reducing the deficit, Greece has undertaken commercial debt restructuring to reduce its overall debt burden.
The claims of sustainable finances would be more believable if S&P did not immediately say this in the very next sentence.
The fiscal consolidation underway is largely premised on tax hikes and improved tax collection, an extensive privatization program, and wholesale cuts in government spending.
The chance of this premise surviving the week is exactly none. On Saturday Greece will hold national elections in which anyone favoring budget cuts will be lucky not finish at the bottom of the Aegean Sea.
Big Spanish banks slide closer to bankruptcy
EU governments, desperate for cash, can't borrow
Spain is worse off than Greece two years ago
S&P also justifies its rating on the basis of:
A relatively high level of income per capita. At $26,700 at the end of 2011, GDP per capita is high among its peers, even though consecutive years of recession have resulted in a significant decline from above $30,000 in 2008.
It says this while at the same time noting that the nation's GDP shrank by 6.9 percent last year and is expected to lose another 5 percent this year. S&P also says that the best case scenario has Greece's government debt staying at least 160 percent of GDP through 2015.
The credit ratings agencies are hopelessly behind the curve. Last week they cut Spain's ratings and the markets shrugged it off because investors have known for some time that the economy there is a train wreck. Add all this to the fact that the agencies didn't just miss the boat on mortgage securities they missed the whole ocean and you have to wonder: Why are they still in business?
