Over­rated

SA pays price of col­lu­sion be­tween Wash­ing­ton and rat­ing agen­cies

Finweek English Edition - - Openers - TROYE LUND

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

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