China tries realistic rating
By Joergen Oerstroem Moeller
The Western, almost exclusively American, rating companies - Moody's Investors
Service, Standard & Poor's and Fitch Ratings - got it completely wrong when
they missed the 2007-2008 global financial crisis. Even if you cannot hold them
responsible for the calamities, their integration in the financial system casts
doubts on their ability, and maybe also inclination, to act independently of
the big banks and financial houses. It was not in their interest to publish
warnings over the risk exposure of the large financial institutions. They were
supposed to act as whistleblowers, but didn't.
When the crisis shifted to sovereign debt among European countries another
failure emerged.
The Greek problem was clearly visible, but they did not act until it
was almost over. Standard & Poor's downgraded Greece's debt rating to junk
status in April 2010. Moody's followed after in June 2010. Fitch now has a
rating of BBB-minus, it lowest investment-grade rating.
Surprise, surprise. The crisis about Greece exploded late January 2010 and the
problem was known in the financial world long before that. The announcement of
junk status in spring/early summer looks almost as a doctor announcing heart
difficulties for an already dead man. If it was not so sad it might be
hilarious.
What might have been expected from the rating agencies was an analysis at much
earlier date, including a look at the role of American institutions, in
particular Goldman Sachs, instrumental in helping to hide liabilities worth
more than US$1 billion while at the same time cashing in with a profit of about
that size.
The question might well be posed, as it is now, how Goldman Sachs and the Greek
government got away with it. Part of the answer lies in the still not available
explanation from the rating agencies as to why they did not see this happening
and cry "wolf". It was indeed their obligation to do so. That is why they are
there.
Raised eyebrows in other financial center has led to the birth of rating
agencies to compete with the US companies and put forward analyses based on
other criteria; they might possibly also act independently of the financial
institutions on Wall Street. In other words, they may be more trustworthy not
having congruous interests with the financial institutions.
China now has its first rating agency, Dagong. It offers rating for sovereign
debts for 50 countries and compares its ratings with Moody's, Standard &
Poor's, and Fitch. The result is a higher credit rating for a number of Asian
or other non-Western countries and correspondingly lower credit ratings for
some of the established heavyweights like the US.
Dagong rates the US at AA, its third-highest grade, compared with top ratings
of Aaa from Moody's and AAA from both Standard & Poor's and Fitch. The UK
gets AA- from Dagong (one level below its rating on the US) while the three
American agencies give the UK the same rating as the US.
Dagong awards AA+ to China, one notch above its assessment of US sovereign
credit risk, compared with A1 by Moody's, A+ by Standard & Poor's and AA-
by Fitch. Similarly, Saudi Arabia, Russia, Brazil, and India score better in
the Dagong analysis than they do at the hands of the American agencies. How on
earth somebody - for that, read the American agencies - can give the US and the
UK higher credit ratings than China in view of the already high, but still
rising debt and not very optimistic economic outlook for these two Western
countries remains at the very least remarkable.
The explanation for the difference is the tendency of the US agencies to look
more narrowly at short-term possibilities to repay debt instead of using
long-term studies that take into account the fundamental basis for continued
economic growth.
It may well be that the US and the UK are able to repay their current debt
partly by relying on borrowing, but it may incur a rising debt over a longer
term, thus aggravating the debt problem and undermining the capacity to reduce
the ration of debt to gross domestic product (GDP).
A forecast for the US shows beyond any doubt that the burden of servicing its
sovereign debt over the next decade will weigh heavily on the economy and
constitute a barrier for growth policies. More and more tax revenue will need
to be channeled into servicing debt, limiting funds for other purposes.
Just a couple of days ago, the White House Office of Management and Budget
announced a deficit on the federal budget of US$1.471 billion for fiscal 2010
(10% of GDP) and $1.416 billion for 2011 (9.2% of GDP). The White House also
stated that the US is on track to meet the commitment to halve the deficit by
2013. This assumption rests, however, on a wildly optimistic forecast for
economic growth at 3.2% this year, 3.6% in 2011 and 4.2% in 2012. It is already
clear that growth this year will not be anywhere near 3.2%, but rather around
2.5%.
There is much to be said for the approach chosen by Dagong. It is a fresh
attempt to introduce competition and alternative views in the ratings business;
the crisis demonstrated how sorely it is needed.
It is also a signal that Asia countries, in possession of the lion's share of
the world's savings, are not disposed to stand idly by and see the US maintain
its monopoly on how to rate countries around the world. First, they missed the
financial crisis; next, they missed the debt crisis among Southern European
countries; now it looks as if they are going to miss the coming US and UK debt
crisis.
Joergen Oerstroem Moeller is visiting Senior Research Fellow, Institute
of Southeast Asian Studies, Singapore and Adjunct Professor, Singapore
Management University & Copenhagen Business School.
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