Rating agencies have assumed an importance in economic and financial circles that their originators probably never dreamt of. As analysts they appear to have become more relevant than the object of their analysis. Whether thereby they are contributing towards more stable and effective global economic and financial systems is another matter.
The recent downgrade is not the end of the world since we are part of a pack- Lino Spiteri
The agencies faced widespread criticism when the subprime crisis broke in America. They had not alerted the financial community that sub-prime instruments were in essence a house of cards, of less value than the paper they were written on. Instead of making rating agencies apologise and reconsider their value to others, the crisis spurred rating agencies into tightening up their conclusions, becoming feared judges of the actual and forecast situations in the countries and corporates they set their sights on. That development has led to questions whether investors should pay rating agencies as much attention as they are doing. The answer cannot now be given by those at the receiving end of the agencies’ examining instruments. Nevertheless it remains true that the agencies’ importance has ballooned beyond the justifiable.
Rating agencies are made up of individuals, expert in their own field, no doubt, but not necessarily more expert than many of national and corporate leaders they train their sights on. The difference is that, while national and corporate leaders have to suffer the intimate attention of voters and the market, which in turn influences investors who finance their borrowing, rating agencies are independent of such pressures.
Their word has become final. To the extent that their reports strike fear all round, they threaten the leadership of the US, and they have now moved on to push the European Union as a whole into becoming a suspect of crisis, rather than the entity which collectively, and with the aid of the International Monetary Fund and the independent European Central Bank, can resolve the crises within it.
Last week threat turned into reality. One of the world’s three top rating agencies, Standard and Poor’s, downgraded its ratings of nine eurozone countries, in the first instance because of the unstable situation within the eurozone and the EU as a whole.
Malta was among those nine countries, one of those which fared least badly because its rating was cut by one notch. Other countries, including our sister-Mediterranean island, Cyprus, lost two notches. As with the other countries the rating cut was attributed to the situation in the eurozone other than, with the exception of Greece, to deterioration in the prevailing state of the targeted countries.
In Malta’s case, for instance, it cannot be said that the economic situation has deteriorated since the most recent of Standard and Poor’s’ rating exercise. Malta, no doubt, is under the shadow of the threat, moving ever closer to a reality, of recession reappearing in most of its main markets. That is a factor outside the hands of the Maltese authorities and our economic agents.
If anything Malta’s position has been strengthened by the EU’s imposition on it to take concrete steps to reduce the forecast deficit this year by some €36 million below that forecast by the Minister of Finance in his November 14 Budget. I am not sure where that imposition was taken into account by S & P.
It raised controversy in Malta because it came so soon after the estimates of 2012 revenue and expenditure were passed through the House of Representatives. It reflected on the government in the sense that its financial planning was not, according to European Commission, tight enough. The imposed cuts could affect economic activity, and thereby the forecast GDP, since jobs and demand will be affected by the foregone expenditure.
But, in financial-health terms, the Commission’s imposition can, if successful, translate into sounder public finances. Yet Malta was lumped together with the weaker nine. Perhaps, given our size, Malta’s experience at the hands of Standard and Poor’s pales into insignificance in comparison to the downgrade of France, which lost its prized AAA status. French authorities were quick to point out that Standard & Poor’s downgraded their country, but said nothing about Britain’s position which, by most benchmarks, is worse that of France.
That notwithstanding, the downgrade will remain, and its consequential effects will take place, including more expensive servicing of the public debt.
All that said, I for one would not like to see the rating agencies getting out of the scene. They have too much implicit power, certainly. Yet the fact that they exist, probe and comment from the outside is of considerable help to the internal debate within the surveyed countries. Last week’s downgrade of Malta’s status was a sort of template affair.
Yet there can be little doubt that, left to its own devices, the government has been overstating the country’s economic performance and the state of its public finances. If anything the rating agencies, and European Commission as well, have not properly dissected and analysed this year’s estimates. The revenue side, I continue to feel, is overstated in the sense that one-offs, like the take from a new public lotto licence, is not sustainable. Time will tell.
Meanwhile the recent downgrade is not the end of the world since we are part of a pack. But Malta cannot afford other downgrades due to internal factors, now including political instability.