Who Still Pays Attention To Rating Agencies? They Get It Wrong Most Of The Time

April 19, 2011

Dan Majestic writes from New York: The markets have trembled – again. This time investors panicked in response to credit rating agency Standard & Poor’s warning that the United States is failing to cope with its budget deficit and high national debt. The US still has an AAA credit rating, but S&P hinted that it might lose it in if it doesn’t do something about its finances.

I have two questions. First, why on earth does anyone still pay any attention to rating agencies? And, second, are markets that stupid as to fall for any piece of seemingly bad news that isn’t really based on any full proof credible data?

It’s becoming ridiculous that speculators, who thrive on panic attacks that hit the markets with frightening regularity, manage to whip up hysteria with such ease. Yesterday, when news about the warning issued by S&P became public knowledge, the FTSE in London lost 2 per cent of its value and the Dow Jones fell by 140 points, both caused by panic selling of US Treasury bills. It was as if S&P had revealed something that no one knew already: that America had a big deficit and instead of doing what Britain did, i.e. strangling its economy, was spending its way out of trouble. (By the way, in the same assessment S&P praised the British government’s austerity measures that are supposedly what is needed to get the country out of the current mess.)

Anyway, why should anyone listen to what S&P says? It’s part of the strange group of rating agencies that have a miserable track record of predicting trouble in the world economy. They missed the collapse of the Tiger economies back in the 1990s, they slept through the dotcom bubble bursting and they didn’t even flinch when the financial crash of 2007 came about. There were hilarious situations when banks on the brink of collapse still had a very decent credit rating. So how come these people, who often base their predictions on pure politics, have still the clout to tell nations what to do?

America has spent its way out of trouble in the past. It’s the biggest economy in the world and it can afford to get into debt, having the muscle to get out of it. It actually produces goods, unlike Britain that has a near dead manufacturing industry and relies on its financial sector and consumer spending power to stay afloat. But with Chancellor George Osborne’s policy of safeguarding the banks and throwing money at politically correct causes, like the huge overseas aid, while financing two opportunistic wars and strangling everyone with his fuel duties, chances are that Britain will go down with its AAA credit rating and will have to beg the IMF for a bail-out.

And for speculators, who unashamedly exaggerate every bit of news about the state of the world economy, it is really beginning to look as if the markets are hijacked by a bunch of lowlifes and crooks, who use every opportunity to rip off investors, just like it happened yesterday. It’s obscene that one rating agency with a rather unspectacular track record can cause so much panic. Has there been some sort of an agreement struck between the interested parties? It would be good to know, if only to satisfy a feeling of nagging curiosity.

In America itself Republicans in Congress have jumped at the opportunity to have a go at President Obama, saying it was time for the White House to adopt responsible fiscal reforms. These are the same people, who under George Bush allowed the financial crisis to get out of control because they were too preoccupied with waging wars abroad and running up a tab of about $1 trillion. It’s a bit like George Bush creeping out of his hole and lecturing others on how to win the war in Libya.

In an ideal world after the 2007 crash the financial markets should be monitored on a constant basis, with unscrupulous operators nailed at the first sign of any suspicious activity. Like, for example, checking who was selling big right before S&P came out with its assessment yesterday and then buying big at a discount.

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Category: Business · 1 Comment »
Tags: credit warning, deficit, S&P, US