Why S&P could be right and european politicians totally wrong

I know rating agencies have done a terrible job at assessing the banking sector health up to 2007. And this is a big  faux pas  on their part if I may say so. However, it is time we should start paying attention to what they are saying.

Take for example the latest development where S&P is putting on negative outlook all basically euro zone debt. Right after their announcement a plethora of political messages came out trying to undermine the credibility of the rating agency or their analysis.

Before you succumb to political propaganda you might like to take a look at the next graph: Euro zone debt as percentage of GDP. Don’t you think that we should be at least a little worried?


8 thoughts on “Why S&P could be right and european politicians totally wrong

  1. Ok, we should pay attention to rating agencies. I am not among those who blame rating agencies for everything or tend to override their analysis. But I expect from rating agencies to tell me something what I dont already know. Also, their timing is execrable. Yesterday [Monday] was the best day for the barrowing costs in Europe since August, so I find the S&P’s decision to put eurozone on negative credit watch very inappropriate. And remember how the US credit rating has been lowered by S&P. Deja vu? 🙂 Furthermore, I suppose the S&P was on vacation over the summer and they could not see that “the lack of progress the European policymakers have made so far in controlling the spread of the financial crisis may reflect structural weaknesses in the decision-making process within the eurozone and European Union.”, as they say in the press release regarding the downgrade of Germany. Some time ago I read an article on Reuters [unfortunately I dont find it] about rating agencies, and the main idea was that for rating agencies are working people who are not good enough for hedge funds or banks. Basically, if you were very good to analyse bonds, you would trade for an hedge fund. Maybe this is wrong, maybe is right, but their ratings and forecasts are likely the most lagging indicator for markets and certainly the impact on indices or yields is diminished as their credibility declines.

    1. Sergiu,

      Not all people dealing with the bond market should be traders. I hope some are working for ministries of finance, some are professors, some are rating agencies employees etc. Also, bond traders were/are not very smart either. They spotted the sovereing debt problem way to late and some are still funding bankrupt governments. Irrespective of how smart the rating agencies people the bond traders are, we should not allow politicians to hide the truth by undermining the messenger. Now the rating agencies are stupid and before it was the market who was irrational and full o evil speculators.

      Sent from my iPhone

      1. I agree, but I hope that working for rating agencies is not the last choice of people dealing with the bond markets.
        However, I expect from rating agencies to be more compelling and maybe to undermine the power of politicians to hide the truth. Unfortunately, at this moment their credibility is damaged and that is in favour of politicians.

  2. from an analysis I read this morning…

    “The rating agency’s move away from looking simply at national states and towards an assessment of the euro system as a whole no doubt sets the stage for the future, but compared to the UK and the USA it still leaves some questions unanswered. These latter two economies also suffer from high budget deficits in 2011 (estimated 8.8 % of GDP and 7.7 % of GDP,
    respectively), while the eurozone as a whole will have a deficit of an estimated 4.1 % of GDP in 2011.

    In addition, the UK, but even more so the USA, rely on external capital inflows. Their trade balances’ structural deficits have shown this since the mid-eighties at the latest. In addition, both countries have central banks that – unlike the ECB – are prepared to risk future monetary stability by expanding the monetary base to an extreme degree. So the question is whether the credit rating of a completely integrated eurozone should not be higher than that of the USA and Great Britain.

    Moreover, it is also highly debatable whether the national states should receive lower ratings precisely at a time when they are increasingly moving towards integration at the political level.”

    1. I love backward looking analysis, or incomplete ones for that matter. They do not say anything that you can use. At least to me.
      There is one thing missing from the analysis you point to: current and future economic growth for those regions. Lower GDP can very rapidly push a country from solvent to insolvent. In the same time the ultimate risk in Europe is EURO break up something that neither US nor UK have deal with, at least in the same manner as the euro zone countries will.

      Of course US and UK are not good examples to follow when we talk about government debt. But they can still fund themselves in the market, something that cannot be said for euro zone. Also, I said the same thing about US politicians when US was downgraded: stop with the BS, there is something very wrong and unsustainable with the level of US debt.

      One thing that everyone keeps forgetting is that default by a country is not an economic decision but rather a political one. And sometimes form a political point of view default is the best option.

    2. I think an analyst that can view the euro zone as a “completely integrated bla bla” is not an analyst, actually. Sorry 🙂

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