Downgrade S&P et al

Downgrade S&P et al

If Standard & Poor’s hadn’t dropped its rating for U.S. loan guarantees to Israel at about the same time it downgraded the U.S. credit rating from AAA to AA+, we wouldn’t have tackled the S&P story at all.
But S&P recently announced that ratings for Israel’s loan guarantees dropped commensurately with its downgrading of the U.S. credit rating.
That means two nations — the United States and Israel — with impeccable records of making bond payments, have been hurt by a faceless agency acting on little more than its own opinion.
So here we are.
Even if Congress had failed to pass an agreement lifting the U.S. debt ceiling, and the country had gone into default, most economists agree the government would have used whatever revenue it had coming in to make its bond payments before anything else, precisely because it didn’t want to jeopardize its credit rating.
So what happened? Republicans and Democrats reached a debt ceiling agreement, a default was averted, the debt ceiling was lifted . . . and S&P still downgraded its U.S. credit rating. So far, the other two major credit agencies, Moody’s and Fitch, have not.
To put this in perspective, S&P is now saying that France, a country with a higher unemployment rate, slower economic growth and a higher debt ratio, is a better credit risk than the United States. So is the United Kingdom, which just endured days of a violent urban riots partly induced — we believe — by a series of harsh austerity measures, including cuts to public services and the elimination of half a million public sector jobs, which the British government put in place to bring its own debt problem under control.
According to the “The World” news program on Public Radio International, questions are being asked about France’s credit rating, though S&P (and Moody’s, and Fitch) say that it is not at risk. “Still,” wrote The World’s Jason Margolis, “experts say it’s just a matter of time before more downgrades come.”
Downgrading ratings for Israel’s loan guarantees makes no sense. S&P’s overall rating for Israel — A/A-1 — indicates a “strong” capacity to meet financial commitments, and that rating was left untouched. The Tel Aviv Stock Market experienced its largest one-day loss in nearly three years in reaction to the downgrade of the U.S. credit rating.
But then, much of what S&P and other rating agencies do makes no sense. Keep in mind these are the same entities that backed banks issuing subprime mortgages — the very financial product that crashed the U.S. housing industry and sent the country into its worst financial crisis since the Great Depression, and no one held them accountable.
Well, almost no one.
According to the U.S. Financial Crisis Inquiry Commission, S&P, Moody’s and Fitch were “key enablers of the financial meltdown” of 2008, concluding that credit rating agencies grossly underestimated the risk of mortgage-related securities at the heart of the subprime crisis.
Is it possible the S&P downgrade constitutes a little payback? We hop not, but the timing is suspicious.
Many in the financial sector are calling for investigations into the credit rating system, which could lead to its reform.
Count us in. It’s time for the public and private sectors to cooperate on developing a new, more reliable method to gauge investments. The ratings agencies are showing their age. It’s time to downgrade them.