Rating Agencies De-Stabilize Shaky World Political Economy

Feb. 3, 2011 - PRLog -- By David Caploe PhD, Chief Political Economist, EconomyWatch.com

Of the many topics significantly under-analyzed by the so-called / self-styled / allegedly investigatory Financial Crisis Inquiry Commission,

among the MOST significant omissions was the role of the credit rating agencies, the supposed guardians of the integrity of the financial world.

We have already examined in some depth several of the mysteries of, and structural problems created by, the rating agencies.

So while it's no surprise, it's also disturbing to see how these alleged protectors of the "honor" and sanctity of global investment

are, in at least three current difficult instances, quite obviously making bad situations worse:

   *  the decades-long stagnation in Japan;

   *  financially desperate US states; and the

   *  rampant socio-economic inequality fueling the people power movement now sweeping the Arab world.



Japan

Simultaneously the most and least surprising is Standard & Poor's downgrading of Japanese sovereign debt.

What's not surprising is that Japan's debt is now being rated as being worth so little.

After all, it's been wallowing for more than 20 years in the same sort of TBTF banker-dominated mess

into which the US and EU have so eagerly thrown themselves in the aftermath of Black September 2008.

But given the on-going problems in both the EU and, in a different way, the US,

it seems a strange time to create even more problems for the "third leg" of the trilateral, if you will, developed world.

The rating agencies have their own bizarre motives, though, so who knows why they chose now to make this otherwise reasonable move --

apparently they don't care about how much they further tighten already grisly political economic knots.

But let's look at the dynamics of S.& P.'s decision to lower Japan's sovereign credit rating last week to AA- from AA.

That is three levels below the highest possible rating, and S.& P.’s first downgrade of Japanese government debt since 2002 --

which is what makes us wonder "why now ???",

given that Japan's economy has been in serious flatline since long before AND after that year.

With the lower grade, Japan’s debt rating is now on par with China’s,

which last year overtook Japan as the world’s second-largest economy, after the United States.

S.& P.’s move came just weeks after both it and its rival ratings agency, Moody’s, cautioned that

they might take a more negative stance on the United States --

which could be even MORE de-stabilizing, as we will see shortly.

The move highlighted just how deeply indebted many of the world’s developed economies are —

despite concerted efforts on the part of their governments to improve their balance sheets ...


Financially Struggling US States

Moody’s Investors Service has begun to recalculate the states’ debt burdens in a way that includes unfunded pensions,

something states and others have ardently resisted until now.

States do not now show their pension obligations — funded or not — on their audited financial statements.

The board that issues accounting rules does not require them to.

And while it has been working on possible changes to the pension accounting rules,

investors have grown increasingly nervous about municipal bonds.

Moody’s new approach may now turn the tide in favor of more disclosure.

The ratings agency said that in the future,

it will add states’ unfunded pension obligations together with the value of their bonds,

and consider the totals when rating their credit.

The new approach will be more comparable to how the agency rates corporate debt and sovereign debt.

All of which is fine -- but one has to wonder why Moody's chose this particular time to weigh in on the issue of states' debt ???

It comes precisely when the question of under-funded public sector pension plans has become a MAJOR issue of political contention --

and their taking the position they seem to be espousing gives SIGNIFICANT "aid and comfort" to one side in the conflict,

namely, those who want to cut back on the existing contractual obligations of individual states to their employees,

and, indirectly, to attack the already-eroding power and influence of the public employee unions that gained those benefits for their members.

Moody’s did not indicate whether states’ credit ratings may rise or fall.

Under its new method, Moody’s found that the states with the biggest total indebtedness included

Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island.

Other big states that have had trouble balancing their budgets lately, like New York and California, tended to fare better in the new rankings.

That is because Moody’s counted only the UN-funded portion of states’ pension obligations.

New York and California have tended to put more money into their state pension funds over the years,

so they have somewhat smaller shortfalls.

In the past, Moody’s looked at a state’s level of bonded debt alone when assessing its creditworthiness.

Pensions were considered “soft debt” and evaluated separately from the bonds, using a different method.

In making the change, Moody’s sidestepped a bitter, continuing debate

about whether states and cities were accurately measuring their total pension obligations in the first place.

In adding together the value of the states’ bonds and their unfunded pensions ...


People Power in the Arab World

Budget stress is a relatively minor factor in the final area of global political economic tension

into which credit rating agencies have so dramatically thrust themselves:

the wave of popular demonstrations and "people power" now sweeping the Arab world.

As the turmoil gripping much of the Arab world reaches a critical pitch in Egypt,

the possible economic fallout is on the minds of credit ratings agencies,

monitoring the situation from thousands of miles away,

who apparently don't like what they see.

But the warnings they themselves have issued have ALSO raised eyebrows.

Fitch Ratings said that it was putting a “negative” outlook on Egypt,

as protesters there clashed with security forces and defied curfews, raising questions about the country’s political stability.

That warning came on the heels of a report by Standard & Poor’s saying upheaval in Tunisia,

where mass protests drove the longtime president from office,

risked creating “downward ratings pressures” on other governments in the region,

if leaders tried to calm social unrest with “populist” spending on tax cuts, subsidies, and public sector jobs.

At the World Economic Forum in Davos, the agencies’ actions at such a sensitive moment set off alarm bells of their own.

“For a ratings agency that contributed to the recession, they seem to be getting it wrong again,”

said Kenneth Roth, the executive director of Human Rights Watch, which has several observers in Egypt.

Roth took issue with the assumption that maintaining the status quo was safest for investors:

“These unresponsive, brittle dictatorships are the last thing that the region needs to develop economically.

The Middle East is stagnating because it has had to operate economically under authoritarian governments.”

While the sovereign debt issued by countries in the affected region is already far from top-rated —

Fitch rates Egypt at BB+, near the risky end of the investment-grade range —

Timothy Garton Ash, a British historian and author, said in a separate interview that

raising the specter of a downgrade now was “ill-advised.”

“It poses the question that came out of the 2008 financial crisis:” he said,

although few organs other than EconomyWatch have consistently raised that question:

“What is the legitimacy of the ratings agencies? By whom are they authorized?” ...

Read More at EconomyWatch.com ... http://www.economywatch.com/economy-business-and-finance-...

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