Do the rating agencies run the world?

Already last year, the European states rebelled against the repercussions caused by the brutal lowering of the ratings of the Mediterranean countries. Today, we thought the storm was over, but as we all know, recently Standard & Poor’s did not let go of the United States.

Why is the note of sovereign states so important?

State or corporate debt ratings provided by rating agencies are used to assess credit risk. The lower the rating, the greater the risk of default. In this sense, the rating provides investors with an indication of objective reliability for their investments.

As we know, the risk is paid. The riskier the investment, the more it is paid, it is one of the basic principles of borrowing and saving: the cost of risk. Thus, the rating agencies have the role of quantifying this famous risk, the rating is the result. As a result, the lower the rating, the higher the risk, so the higher the interest. Of course, it goes without saying that countries prefer to borrow at the lowest rate, and therefore have the highest rating.

For the first time, we were able to experience the effect of too much debt in a struggling economy. The effect is noticeably disastrous, of course we are talking about the case of Greece. As agencies degraded the rating, long bond rates climbed. Hard to believe that these could have reached more than 17%, at this level we could rather talk about wear rates or just revolving credit …

Another parameter to take into account is the residence of the debt holders in question. Indeed, if the national debt is heavily held by foreigners, interest rates will tend to fly much faster. For example, Japan has been in a very difficult situation for several years, its rating with S & P is only AA- and yet its bond rates are close to 0. In the same way, despite a very bad economic situation the rates of interest on the Italian debt did not react much because it is owned more than 60% by Italian residents.

Some criticisms concerning agencies and their image

Each month, the agencies degrade the rating of some states, everyone complains and governments on the front line. By discrediting the agencies, we try to minimize their impact. To believe the criticism, it would be necessary that each country of the world is equipped with a triple-A immutable. The agencies note, it is their work, they calculate almost nothing, they use the OECD or IMF figures to base their analyzes. According to Timothy Geithner, S & P was wrong by 2000 billion in its calculations, so it is the IMF that would have been wrong 2000 billion …

Agencies are being caricatured, everywhere in the media, they become “the modern financial devil”. Despite significant economic power and diversity, the situation in the United States is utterly deplorable. When analyzing the economic situation of a country, it is not enough to say that the United States is the first world power to say that the situation is good. We do not compare the countries, we compare the situation of a country today compared to yesterday, it is the very basis of the growth indicator. In this sense, we see that at this time, the nation of 50 states is really not good. Despite a very flexible monetary policy, the economy is not moving forward, unemployment figures are very clearly skewed (15% rather than 9% in reality) and bad at the same time. In addition, recent events show a political power that is disunited and unable to fight the debt. Standard & Poor’s has lowered the rating, it seems to me that it could even have done before to the views of very passable statistics …

A clearly black point for the agencies is the number of analysts. Standard & Poor’s has just 100 analysts to rate 136 countries. The lack of qualified staff seriously affects the image of the agency, which has less than one analyst per country.

Another popular myth that is often heard these days is the speculative conspiracy. That is to say that the agencies agree to plunge at full speed a country and allow different funds to speculate down by different methods (CDS, …). In general, agencies report downgrades at favorable times. For the United States, S & P chose the Friday night after closing to announce its degradation, if the agency wanted to make a real crash, she could have sent the news at 14:30 midweek. On the contrary, the one was careful not to send the markets by the bottom leaving the big leaders, the time to find solutions during the weekend …

Rating agencies do not lead the world, they only show the results of the policies of each country. The nations of the world are still sovereign in relation to the agencies. In the case of a loss of reliability of the debt, if it is strongly foreign, then indeed the domestic policy loses its power. But the lost power is not given to agencies, it is to foreign investors that it comes, we must not be wrong, it is the lenders who exert the pressure, not the agencies.