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You are here:Home>>Strategic Research & Analysis>>Standard and Poor's as a political watchdog
Saturday, 20 August 2011 01:08

Standard and Poor's as a political watchdog

Written by Emeka Chiakwelu
S&P S&P

The emergence of S&P as a political watchdog may weaken trust and confidence in the global market

There was a manifestation  as Standard & Poor's downgrade US credit rating to ‘AA+’ from ‘AAA'  . The revelation is that the mandate of Standard & Poor's is beyond financial observation and evaluation but also political. Among the numerous reasons given by S&P on the downgrading of the world largest economy is its cumbersome political process and slow policy formulation in Washington. Standard & Poor's stated , "More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policy making and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011."

 

This latest development maybe beyond the agency's mandate which is to verify whether an entity be it a sovereign nation or corporation can meet its financial obligations without default. In this case to verify whether United States can redeem and pay interest on its treasury securities without default. There are no signs that United States will default, therefore the downgrade may not be logical and probably without merit.

 

S&P  in a statement emphasized that, “The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” Therefore this has turned a financial agency into a political watchdog. As S&P journey into this route, the prime ramification may connotes the waning of its grip on the global market. Maybe the next time around China political structure may come into question by S&P. That’s why it is necessary for S&P not to go beyond its original mandate of evaluating the ability of a nation to pay its bill.

Standard & Poor's Downgrade US to ‘AA+’ from ‘AAA'

 

The perceived notion of most people is that S & P is solely a credit rating institution that relies on financial and economic evaluations to make its decisions and overviews. But with the decision it made with the downgrade shows that it has expanded its responsibility to become a political watchdog. The agency has every right to do whatever their heart desires but it is unfair to change the rules of the game at the heat of the game. What S& P did to United States is unfair. There is no logic in the downgrade of the global largest economy from its AAA to AA+. United States is the anchor of global economy; it is the stabilizing fulcrum in global market economy.

 

According to Wikipedia, "Standard & Poor's (S&P) is a United States–based financial-services company. It is a division of the McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian S&P/TSX, the Italian S&P/MIB and India's S&P CNX Nifty. The company is one of the Big Three credit-rating agencies, which also includes Moody's Investor Service and Fitch Ratings. As a credit-rating agency (CRA), the company issues credit ratings for the debt of public and private corporations. It is one of several CRAs that have been designated a nationally recognized statistical rating organization by the U.S. Securities and Exchange Commission. It issues both short-term and long-term credit ratings."

 

The history of and about Standard and Poor's never mentioned its political quest, "With offices in 23 countries and a history that dates back more than 150 years, Standard & Poor’s is known to investors worldwide as a leader of financial- market intelligence. Today Standard & Poor’s strives to provide investors who want to make better informed investment decisions with market intelligence in the form of credit ratings, indices, investment research and risk evaluations and solutions. Most notably, we are known as an independent provider of credit ratings. In 2009, we published more than 870,000 new and revised credits ratings.  Currently, we rate more than US$32 trillion in outstanding debt. Standard & Poor’s is also widely known for maintaining one of the most widely followed indices of large-cap American stocks: the S&P 500. In 2007, the S&P 500 celebrated its 50th anniversary."

 

It further explained its role with strong financial bearings, "Additionally, the S&P Global 1200 covers approximately 30 markets constituting approximately 70% of global market capitalization. Approximately $1.1 trillion in investment assets is directly tied to S&P indexes, and more than $3.5 trillion is benchmarked to the S&P 500 – more than any other index in the world. Moreover, Standard & Poor’s independent equity research business is among the world’s leading providers of independent investment information, offering fundamental coverage on approximately 2,000 stocks. We are also a leader in mutual fund information and analysis."

 

Standard and Poor's should set up a political department that have the best minds and analysts that can do it right, if it decides to add politics as one of the factors to make credit rating decisions; at least make an effort to do it right. US raucous policy making according to S&P contributed to the downgrade and this have exposed the cluelessness of the agency about the workings of Washington. The agency may have proven that it does not understand United States political system. Standard & Poor's should once more be reminded that United States is a democratic system with a functional congress and presidency. In the democratic system of United States the president do not make political decision and impose it to the congress and neither vice versa. In takes time to make decision, sometimes with gridlocks because it was built into the system.

 

Therefore to downgrade US to AA+ is showing lacking of understanding of United States especially the political structure and governance methodology. The S & P may have weakened its global acceptance by its move it made on US credit rating. The world economy is gradually coming out from recession and everybody is feeling good about American leadership. The whole world respects American leadership including China and European Union. The Chinese products were open to American market and United States played a constructive role in bailing out Greece from its financial mess.

 

No one is saying that United States will not adjust its spending, deficit and debt. But United States has never defaulted in its financial obligation since World War II. For since 1917 United States has been a AAA nation. There is no sign that US will default on paying its interest on its debt and there is no reason to think otherwise.

 

Standard & Poor's inability to foresee subprime loan debacle at Wall Street is not something to write home about. S&P may not be thorough and efficient as it led many to believe, afterall many of the mortgage security firms that were involved in the Wall street's subprime loan debacle were given high credit ratings. Therefore S&P may have made a mistake too in downgrading US credit rating to AA+. The Obama's administration shows a great leadership in finally bringing the congress to pass a bill to avert a default. But for the S&P to turn around and downgrade it is not a prudent decision. That is not the right way to get the attention of the policy makers in Washington. The S&P may finally end up with a different result, it has brought instability to stock market and Dow has plunged to more than 635 points in last  Monday’s market and gyration continues. But thanks to the rest of sensible marketers, traders and nations the treasury market was even experiencing a surge. By this act the world is  giving a thumbs up by buying US securities in spite of S&P judgement.

 

Last modified on Tuesday, 23 August 2011 23:50

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