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È tempo di declassare le agenzie di rating?
For many Washington policymakers, the official denouement of the debt ceiling debate came not only when President Obama signed an increase into law yesterday, but when two credit rating agencies, Moody’s and Fitch, affirmed the country’s triple-A rating.
Throughout the rancorous debate, just about every player managed to agree that the United States’ AAA rating should not be threatened, even if they disagreed about how to save it. In his weekly radio address last Saturday, Obama warned that “if we don’t [reach a deal], for the first time ever, we could lose our country’s Triple A credit rating.” House Speaker John Boehner called in to Rush Limbaugh’s radio program during the negotiations last month and said “I believe that we've got to act to prevent a default and to prevent a downgrade of our nation's credit rating.”
Rep. Jim Jordan, head of the powerful Republican Study Committee in the House, said Monday that “Our AAA credit rating remains at risk because President Obama and his fellow tax-and-spend liberals refused to support the Cut, Cap, and Balance plan.” Senate Majority Leader Harry Reid meanwhile claimed that “anything less” than a debt ceiling increase into 2013 would “[risk] an immediate downgrade of America’s credit rating.”
So by almost all accounts inside the beltway, a downgrade in the federal government’s credit rating would be catastrophic. But a closer look at who issues these ratings, how they do it, and the real-world impact of these ratings tells a different story.
The first clue that these ratings might not be highly calibrated, serious indicators of creditworthiness can be found in the 2008 economic collapse. The financial products created by Wall Street that were full of toxic mortgage securities were all blessed with gold-star ratings as safe investments from the country’s three main credit ratings agencies, Moody’s, Fitch, and Standard and Poor’s.
These products were so awful as to destroy Lehman Brothers, threaten many other trading firms, and plunge the economy into recession, but the ratings agencies consistently told investors they were safe. As William Greider has noted here, this essentially made the rating agencies “unindicted co-conspirators” in the collapse.
Were these agencies just bad at their jobs? Maybe, but Greider offers another more sinister theory: since the banks pay the rating agencies to examine their financial products, a harmful rating would persuade the banks to just shop elsewhere for a more favorable outcome. “This is an outrageous conflict of interest at the very heart of the financial system,” Greider writes.
Nevertheless, the Washington establishment was obviously not rattled by the rating agencies role in the 2008 collapse. All three agencies played a prominent role in the debt ceiling debate. Each threatened to downgrade the federal government’s credit rating if there was a default on U.S. Treasury bonds—a reasonable position—but in some cases, threatened to downgrade anyhow if “significant” deficit reduction isn’t achieved, to the tune of $4 trillion in the estimation of Standard & Poor’s. That’s a little harder to understand.
Contrary to Tea Party hysteria, the United States’ debt burden is perfectly manageable. Robert Pollin, a professor of economics at the University of Massachusetts and co-director of the school’s Political Economy Research Institute, noted in an e-mail that the single most significant statistic in evaluating U.S. government debt is the debt servicing burden, meaning that amount of interest payments the government faces relative to annual outlays.
In 2010, interest payments on the debt were 5.7 percent of total government spending. Pollin noted the average for that ratio between 1950 and 2010 was 9.8 percent, meaning that our current debt burden is half the historical average.
So why the panic from rating agencies? Once again, it might come down to good business, not good economics. “The best I can come up with is, in the end, they simply regurgitate what they see as a respectable opinion,” Pollin said. “They do this because they are eager to themselves be seen as responsible and respectable to the people who deliver conventional wisdom. The rating agencies depend on such people for their business.”
This might explain why rating agencies sounded ominous notes about the nation’s debt, but said nothing when the Bush tax cuts were signed into law, which eliminated $2.5 trillion in revenue and were largely favored by conventional Washington wisdom.
But there’s also a more sinister theory afoot—one that involves a game of political hardball between rating agencies, particularly Standard and Poor’s, and the administration. In an exhaustive journal at firedoglake, Jane Hamsher catalogues an interesting confluence of events around Standard & Poor’s threat of downgrade unless $4 trillion in deficit reduction was achieved.
Since the 2008 economic collapse, Congress has been trying to regulate the rating agencies in a tougher manner, in order to force more fair evaluations. The agencies have naturally fought these efforts—and might be making things difficult for the administration as a demonstration of their political power, and to warn the administration off from more stringent regulation.
As Hamsher notes, Standard and Poor’s first debt warning came only months after Obama signed Dodd-Frank into law, which contained regulations on rating agencies, albeit mild ones. This was curious timing, since again there is no chance the United States would experience a debt crisis anytime soon and budget-busting tax cuts previously went unquestioned.
This year, on April 13, Treasury Secretary Timothy Geithner met with officials from Standard & Poor’s and asked them to hold off on any further reports until a budget was completed. But the SEC was in the midst of a series of proposed rule changes and potential investigations of Standard & Poor’s role in the economic collapse. And on that same day, the Coburn-Levin Senate Permanent Subcommittee on Investigations released a report saying the credit ratings agencies were a “key cause” of the financial crisis. The Subcommitee recommended the SEC use its authority to “hold credit ratings agencies accountable in civil lawsuits for inflated credit ratings.”
On April 15, Standard & Poor’s phoned the White House and told them they were issuing a press release providing yet another negative outlook on federal government debt, which it then did. This came at quite a politically sensitive time for the White House, as it was attempting to negotiate a debt ceiling increase with Republicans demanding huge cuts. Geithner had to do a round of talk show interviews the next day, disputing the Standard & Poor’s rating threat.
But the damage was done. Majority Leader Eric Cantor immediately heralded the rating threat, and said “today S&P sent a wake-up call to those in Washington asking Congress to blindly increase the debt limit…[this] makes clear that the debt limit increase proposed by the Obama Administration must be accompanied by meaningful fiscal reforms.” Presidential candidate Mitt Romney meanwhile noted that Standard & Poor’s “just downgraded their view for the future of America.”
It’s not a proven case that Standard & Poor’s was trying to bully the administration with downgrade threats, but since there’s no real economic basis to those threats, it’s at the very least an interesting question.
In any case, since the rating agencies aren’t basing their warnings on hard economic data, would a downgrade rattle savvy investors? Perhaps, but it’s not as certain as politicians claim. Pollin noted that since interest rates on U.S. Treasury bonds are at all-time lows, it’s very likely that investors understand them to be a safe investment. “I’m not sure it would have any impact whatsoever,” he said, but added that it could create some collateral panic in the markets anyhow. “Investors frequently act on the basis of incomplete, or even inaccurate, information. They could therefore interpret the downgrade as evidence of a rising default risk.”
It’s also important to note that while Washington policymakers still hold rating agency approval as sacred, corporate America has long ago jettisoned them. Only four companies hold AAA ratings. Many others, like Berkshire Hathaway, General Electric and Pfizer lost that rating long ago—but are still raking in profits and selling large amounts of stock. According to the Boston Globe, the credit ratings are seen by companies as “more of a straitjacket than a path to riches.”
There are already attempts underway to further break the stranglehold of rating agencies. Much to its credit, the SEC recently scrubbed any reliance on rating agencies from federal rulebooks, and created new standards of creditworthiness separate from what is dictated by the current rating agencies. “I believe the rules will provide an appropriate and workable alternative to credit ratings,” Mary L. Schapiro, the agency’s chairwoman, said in a statement. Pollin has proposed a public, government-run rating agency that could provide a “counterforce to the perverse incentive system facing private agencies.” If these efforts are successful, companies like Standard & Poor’s might face a downgrade of their own.