Posts Tagged ‘Moody’s’

Labour must be careful: Osborne wasn’t downgraded for cutting, but cutting the wrong way

25/02/2013, 07:00:53 AM

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.


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Osborne’s fear of credit rating agencies is costing Britain jobs

04/04/2011, 04:00:53 PM

by James Watkins

Whether voiced by George Osborne at the dispatch box or by Andrew Neil on the This Week sofa, the message is the same: it is too late to change course on the massive deficit reduction plans, otherwise the markets would be spooked. This new line is a response to the growing success of the belated Labour campaign that the cuts go “too far, too fast”.

So how does Labour now move from the government’s line that the cuts are needed to tackle the “mess” of the Labour years to the fatalistic line that it is too late to change course. The heart of the counter attack is to expose the fallacy that the views of credit rating agencies should always be heeded.

Credit rating agencies are necessary. To oversee levels of debt and economic performance, independent and well run credit rating agencies have their place. The markets cannot function properly if risk is not independently checked. Otherwise business judgements would be made in the same way as playing poker in the dark.

But the credit rating agencies have not been as good at their job as they have at their PR. Between 2002 and 2007, an estimated $3.2 trillion in loans were made to US homeowners whose poor payment records were known. These loans were bundled up in securities – or investment packages – that were sold across the world. As the respected economist, Joseph Stiglitz, said

“I view the rating agencies as one of the key culprits. They were the party that performed the alchemy that converted the securities from F rated to A rated”. (more…)

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