“Rating agencies base decisions more on politics than economics”
December 17th, 2011
In the coming weeks and months both France and Britain could see their prized triple-A credit ratings downgraded by feared, if increasingly discredited, credit rating agencies, writes Ryan Bachoo, 22, a Commonwealth Correspondent from Trinidad & Tobago.
The head of the Banque de France, Christian Noyer, last week criticised credit rating agencies for what he terms decisions being “based more on politics than economics.”
If I hadn’t known any better, Mr. Noyer would have blinded me with the very thought that economics today is not part and parcel with politics. But it is in exactly crunch times like these that leaders start pointing fingers at others, or at least distance themselves from the roots of a problem.
The charade between Angela Merkel, Nicholas Sarkozy and David Cameron has been a thoroughly enjoyable one. Yet, Mr. Noyer in his contribution in the war of words between France and Britain made two very critical points.
Firstly, he stated that Britain should have its AAA credit rating downgraded before France. Britain, he contended, has a higher deficit, at least as much debt, greater inflation and less growth.
In September, the United Kingdom’s public sector net debt was recorded at £966.8 billion, equivalent to 62.6 per cent of GDP, and this excludes financial sector bailouts. If these are included (Royal Bank of Scotland, Lloyds), the net debt was £2,266.3 billion or 148.0 per cent of GDP. This is known as the unadjusted measure of public sector net debt.
Flip the coin and look at France, which is in a better position than Britain, but for how long?
To begin with, France’s debt is escalating rapidly. It might not be as much as other countries at the moment, but it’s getting there fast. Last year, the country’s deficit stood at 7% of GDP. French debt will total 90% of GDP this year and 95% in 2012, according to estimates by Capital Economics. These are around the same levels of debt-to-GDP that earned the United States a downgrade by rating agency Standard and Poor’s.
And as time goes on, France is racking up fresh debt at a faster rate than countries such as Italy or Spain. More than anything else though, a major blow to France is its loss of competitiveness against Germany. France is a major manufacturing centre, and it used to run healthy trade surpluses, but now it runs big deficits. The balance of trade for the six months to June showed a deficit of 37.5 billion euros compared with a deficit of 27.6 billion euros in the latter half of 2010, figures released in August show. The deficit with Germany, its major trading partner, is running at a billion euros a month.
So as much as Britain deserves to stand first in line to have its AAA credit rating downgraded, France will be right behind. But Mr. Noyer also spoke of the validity of ratings agencies today, and he is right. Over the last decade, the once revered rating agencies have lost significant credibility. Standard & Poor’s has failed world economies twice since this global financial catastrophe occurred. Firstly, it was for failing to predict the crisis and giving top ratings to what turned out to be junk investments in the run up to the crash.
Secondly, it admitted making a $2 trillion calculation error in its justification for downgrading the rating of the United States from AAA to AA+ in August and also for erroneously announcing that it would be cutting France’s AAA credit rating in November, even when there were tough decisions being implemented.
It’s difficult to take rating agencies seriously for the top two flaws that 1) cost the world economy trillions of dollars and also failed to serve its purpose as a watchdog for crises like this and 2) when rating agencies begin making $2 trillion errors, it’s all a sham one begins to feel.
Even as S&P now threatens Germany’s credit rating, all I can see is the world again bowing to the feet of Germany much like the 1930s. If it’s any consolation though, I’m not an economics expert, nor am I right 99% of the time.
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About me:
“Hi, I am Ryan Bachoo, a journalist and public relations officer from Princes Town in Trinidad and Tobago. I currently work with the West Indies Cricket Board.
“I am currently working as a broadcast journalist for Cable News Channel 3. I also write on various talking points and current problems facing the world including international politics and the issues of a depleting economy.”
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Opinions expressed in this article are those of the author and do not necessarily represent the views of the Commonwealth Youth Programme. Articles are published in a spirit of dialogue, respect and understanding. If you disagree, why not submit a response?
To learn more about becoming a Commonwealth Correspondent please visit: http://www.yourcommonwealth.org/submit-articles/commonwealthcorrespondents/
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