6 August 2011

Debt and the ratings agencies

Last night, before I went to bed, there were rumours circulating about the possible downgrade of the American credit status by one of the ratings agencies. When I woke up this morning, it was confirmed.

This week has been extremely very busy for me, so I have not a very good opportunity to keep on top of all of the facts. So I’m just sharing some thoughts, and if you spot any mistakes, omissions or the like, then please let me know.

At the start of the week, the reporting we had in the UK about the US “debt crisis” was along the lines of saying it was on a knife-edge where different factions who had a say in the matter could not agree on whether or not to raise the debt ceiling, an international version of a credit limit. This made no sense to me, really. If I have a time limit to pay my credit card bill, it doesn’t help if the action I take is to simply increase my credit limit. What I need to do is to start paying down the debt. Mercifully, my own finances are in good order (which is helpful, since I do work in finance!) and I can always pay down my debts.

But let’s suppose that I had managed to save enough of a deposit and get a mortgage. I would need to pay down this mortgage at a sensible rate. I’d need to make sure I had enough cash to pay for my everyday needs. If I paid too much, too quickly, then I’d have to cut back on some of the essentials. In terms of national economic finance, this would mean public service cuts which inevitably means unemployment. This is the strategy which the current conservative-led government is pursuing.

What the americans seem to have done is remortgage their country. It’s not a long-term solution, and I was shocked when I found out that they had raised their debt ceiling several times over the last few years (I forget the precise number).

What fascinated me was the credit ratings agencies. I have a lot of questions that I haven’t found adequate answers to. To me, as a mathematician, it would be fair to call me a Platonist. So I view the credit ratings as merely recognising a platonic reality that already exists. So if the US has become less credit-worthy, then the downgrade merely reflects this, rather than the US becoming less credit worthy as a result of the downgrade.

But who are these credit ratings agencies? A brief look at their websites show they have some blurb but not a lot of substance. What is surprising is that they seem to be listed companies, rather than international bodies. So who are the shareholders and what are their political-economic agendas? The same question could be asked of those who run the companies. I’d love to find out their political links and leanings, but I don’t have the spare time to research.

1 comment:

  1. S&P are a sub of a financial publications company.

    Companies pay to have their issued debt rated by the agencies.

    They have been quite vocal in their calls for deficit reduction and consolidation plans as the main focus for economic recovery.