by Jonathan Todd
John Moody first offered credit rating services in the US in 1909. By this time, Dutch investors had been buying bonds for three centuries, English investors for two, and American investors for one century. Investors have, therefore, prospered for long periods without credit rating agencies.
Many would argue that they could again. The agencies did not facilitate wise investment by giving triple A ratings to the collateralized debt obligations (CDOs) that were at the heart of the financial crisis. CDOs are, however, complex financial instruments. While the ratings were misplaced, it is understandable that financiers would place value on independent assessment of credit worthiness in the face of such complexity.
The UK is less complicated. We are, obviously, struggling. National wealth has not increased since George Osborne became Chancellor. But national debt has increased by over 30 per cent, taking it over one trillion pounds for the first time in history.
Osborne likes household analogies. His UK is a household with no more wealth than it had almost three years ago and little likelihood that this wealth will significantly increase in the near term. But ballooning credit card debts. This is the kind of household that finds it very difficult to get a mortgage in Osborne’s Britain.
Osborne has not practised the “arithmetic” that Bill Clinton beautifully described and praised in his speech to the Democratic National Convention last year. And we hardly need credit rating agencies to tell us this. Those trading in UK debt certainly don’t. This is why – like France and the US before us – a downgrade may have little impact upon the cost of UK debt. The factors that have led to the downgrade have already been factored into the price.
While the downgrade told us what we already knew, Osborne might privately lament: “The agencies told me to cut or be downgraded, so I cut. Then we didn’t grow and they downgraded me, anyway.” Not only are agencies discredited after their poor assessments of instruments like CDOs, they also urged cuts upon Osborne and welcomed his willingness to go further and faster than Alistair Darling had proposed. Osborne may be frustrated for being punished for following this path.
Up to a point, Chancellor, more balanced counsel would insist. What matters is not only that cuts are made but what is cut. The composition of public spending matters, as well as its level. Net public investment for 2015-16 was cut to just 1.1 per cent of GDP from 3.5 per cent in 2009-10 in Osborne’s 2010 budget.
