SA pays price of collusion between Washington and rating agencies
DESPITE SA RESERVE BANK GOVERNOR Tito Mboweni’s recent comment to MPs that he won’t take rating agencies seriously after revelations they deliberately dished out triple A ratings to give dodgy bonds a gilt plating, economists say investors are still taking what rating agencies say into account. T-Sec economist Mike Schüssler says investors simply have currently nothing else to go on.
That’s bad news for investor confidence in emerging markets such as South Africa. Moody’s, Fitch and Standard & Poor’s have already warned SA its sovereign rating could be downgraded in the face of its large current account deficit and political uncertainty. Meanwhile, a smaller agency – Rating & Investment Information (R&I) – has revised SA’s rating outlook from stable to negative. While that wasn’t a credit rating downgrade – SA’s domestic and foreign currency debt ratings remain unchanged at A and A – Treasury was very quick to put the move in context, pointing out the revision had little to do with this country’s financial system and everything to do with the current financial turmoil worldwide and its impact on emerging markets.
“R&I undertook to revise SA’s outlook back to stable if certain changes related to growth prospects and the external environment were to take place,” Finance Minister Trevor Manuel said.
Meanwhile, rating agencies appear to be going all out and coming down hard on institutions and some countries (Estonia, Pakistan and Romania were downgraded in the space of 24 hours last week) as a means to restore confidence in the value of their services.
Ironically, the timing of that action could be doing more harm than good. It runs the risk of exacerbating a situation where equity prices are detached from fundamental value – and therefore of deepening a crisis of confidence in the global financial system and in rating agencies themselves.
Even though Mboweni’s sentiments echo those emerging in Washington at hearings where politicians in the House of Representatives are on the prowl for scapegoats, the reality is that emerging markets such as SA are casualties of the collusion between Washington and rating agencies. Submissions to the hearings reinforce what’s long been known – and sometimes flagged as a concern – by markets and politicians. Rating agencies have been incentivised by a complete conflict of interest.
It’s a clear case of he who pays the piper calling the tune. Wall Streeters paid credit rating agencies to give sub-prime loaded mortgages top ratings so they could be sold off as dependable investments. In other words, rating agencies are paid by the client whose debt the agencies rate.
The hearings in the US have also underscored just how profitable turning a blind eye to those agencies and their bosses can be. Documents submitted to the House of Representatives showed total revenue for the three leading credit rating agencies – Fitch, Moody’s and Standard & Poor’s – doubled from US$3bn in 2002 to more than $6bn in 2007.
Moody’s – where profits increased fourfold between 2000 and 2007 – beat all companies on the S&P 500 as far as profits go for five years in a row. All that for agencies that in July 2007 declared banking fears were “exaggerated”. Hopes for a credible system of rating may depend on the testimony of Jerome Fons, a former MD of credit policy at Moody’s. Fons called for wholesale changes in how agencies are regulated. The outcome of the current debate worldwide on just how much regulation of global markets is necessary to prevent the current situation from repeating itself is likely to determine the future of rating agencies.
Investors are still taking what rating agencies say into account.
Revision had little to do with country’s financial system. Trevor Manuel
Nothing else to go on. Mike Schüssler