World: on credit watch

Even individuals need a credit rating, so when countries get downgraded it's deadly serious. Spain's the latest to feel the pressure.

Of course, the most significant and notorious downgrade was America's, when Standard & Poor's dropped the US a notch from AAA to AA+ and on Negative Outlook.

Now Spain, subject to S&P citing "unpredictable financing conditions that could squeeze a private sector already pressured by struggling economic growth" as the Telegraph reports. S&P downgraded the Spaniards one place to AA- (or three below AAA). It could get worse for them yet.

Despite the rancour, countries are having to become familiar with this onslaught from the all-powerful New York-based analysts. The biggest agencies, S&P, Moody's and Fitch, all received criticism of their bank monitoring prior to the Credit Crunch which led to the Great Recession. Now, they are keeping a beady eye on banks, corporates and countries to ensure their reputations are not tarnished any further. Given the speed and thoroughness of their actions, agencies are on the ball.  Yet, less than popular in many exalted circles.

Japan, Italy, New Zealand and certain major American, British and French banks have also been downgraded. And Belgium has been placed on credit watch, due to its exposure to Dexia, a Franco-Belgian bank.

Happily, after 488 days without a full-time government, Belgians have bitten the bullet and started to take the business of managing the country seriously. According to Bloomberg prime minister-designate Elio Di Rupo has started six-party coalition talks. With any luck they'll strike a deal struck within weeks. Time is running short for Belgium however, as credit agencies and EU austerity targets must be satisfied. Borrowing costs and the threatened downgrade will have focussed the minds of Belgian party negotiators, it seems.

The agencies' actions have a profound effect. Birmingham, England's second city has been upgraded to a rating higher than that of the United States. With its new AAA rating, Birmingham can issue municipal bonds to investors to fund infrastructure and development programmes.

Meanwhile, after Spain who is next?

Fitch has Bahrain and Egypt in its sights with Watch Negative signals. Moody's and S&P have Belarus on Watch Negative notice. Major economies are not out of the woods either.

By the time countries hit rock bottom their government bonds get regarded as "Junk'. From that level, borrowing costs are horrendous. As the world enters a period of progressive political, economic and environmental uncertainty, the agencies will undoubtedly come in for flak. But better a downgrade and a climb-back than a default or collapse.

The agencies' heads musn't roll simply because they speak the truth. It is the heads of government who should be clutching their necks, as their lax regulatory policies and slothful responses to financial crises lead to investor angst.

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1 comment:

  1. It is the heads of government who should be clutching their necks, as their lax regulatory policies and slothful responses to financial crises lead to investor angst

    Ah, but what to do?

    Austerity just doesn't work, and printing money/borrowing tends to be frowned upon.

    But you know me, I think capitalism is overdue for a downgrade, and that this is just the beginnings of some social and economic catabolism, mainly triggered by resource issues in the energy sector.