Tabloids and ratings agencies: Power without responsibility
There is an old journalistic maxim that the scribbler should report the news and not become the news. “Ah”, I hear you cry, “he’s onto the UK mobile phone hacking scandal” which might finally signal the high watermark in the tabloid press’ sanctimonious, apparently irresistible and always self-congratulatory march into all walks of life. What constituted “in the public interest” and what constituted “of interest to the public” was of no interest, so long as it sold papers. But this is not what I’m on to. It is all about the ratings agencies.
Yesterday, Moody’s slashed Portugal’s credit rating four notches to Ba2 from Baa1 on concerns that the country’s ambitious austerity programme might look fine and dandy on paper but that its chances of succeeding are, realistically, pretty remote. After Monday’s “selective default” bombshell from S&P, one might get the feeling that the agencies are enjoying their ability to play the “harlot’s option”, an arcane way of expressing the presence of power without responsibility. Moody’s has traditionally been more accommodative in terms of sovereign ratings action than its counterparts and this race to the front of the pack should be seen as worrying.
The ratings agencies have always made it quite clear that theirs is only an opinion on a credit and, in effect, if investors wish to take that opinion as gospel, that would be up to them. However, in reality, and especially when Basle III introduced ratings-based capital reserve requirements, these joint-stock, fee-earning companies were elevated to a god-like status. They might not have sought it but they did nothing to prevent it either.
However, their role has now risen above the ordinary as a nation’s ability to refinance its debt in the markets and to a very large extent the cost thereof is being determined as much by the suits in the agencies as it is by the elected political leaders. Government finance is a bit like a whale. So long as it is at sea it is buoyancy neutral and ignorant of its weight. Put it on dry land and it crushes itself to death. Sure, Portugal is in a fiscal mess, as is Ireland, as is Greece and as are a number of other countries, the United States included. However, push a country into speculative grade (I do wish they’d stop bandying around the term “junk” so freely, especially the journo-muppets who have never studied the subject) and its inability to refinance itself becomes a self-fulfilling prophecy.
Imagine for a moment that Moody’s would have raised Portugal from Baa1 to A3 - would that have taking funding pressure off the government and allowed it time to fix itself? Of course that is not very likely and in all probability it would not work but don’t dismiss something that has never been tried. Without the kind of courage to think the unthinkable, America would still be governed by a hundred million bison – which some might think would be a better outcome – but that is for another day.
The agencies can certainly not be accused of playing fast and loose but in this period of incredible market sensitivity, discretion might be the greater part of valour. They must think beyond their models and methodologies and give heed to the impact on borrowers and on lenders of their pronouncements. After the structured credit fiasco, they were frequently accused of harlotry; now they must avoid it again by not being caught playing the harlot’s option.
HEADS ON PLATES
Meanwhile, back in the real world, yesterday I spoke to a forex chum in New York. He felt that for him business had held up remarkably well through May and most of June but that it has now suddenly fallen off a cliff and that he was preparing to take a PhD in twiddling thumbs. Volumes continue to contract and the IFR’s recent report on the probability of job cuts intensifying seems very timely.
I can’t tell you how many banks have told me that they are booking record revenues and that profits are up but I’m afraid I find that hard to believe. If one really wants the truth, all one has to do is to track headcount. However, a certain amount of caution is required as all investment banks perform regular “culls” of what they believe to be underperforming staff around this time of the year. This exercise in trading room Darwinism should not be mistaken for headcount reduction; the real contraction will be managed in a far more subtle way but with the now staggering fixed salary costs, some major firings will no doubt be due before year-end and this time, as opposed to 2008, the lost jobs will likely not suddenly reappear.
This is the 127th business day of 2011 in the UK and it is the 38th day on which the FTSE 100 has crossed 6,000 points in either direction. Relevant? Not at all but as a piece of trivia it brightens up an otherwise dull morning and will impress the mates in the pub tonight.