Tuesday, 17 January 2012

National Credit Ratings ...

Does anyone else wonder about the politics behind the "Ratings" made by these Rating Agencies - all of them, I note, based in the US. Down rating Greece I can understand, but there is a serious side effect to this which I suspect most people miss. When a nation's credit rating falls, the interest its creditors charge for their loans to the national Treasury go up.

The rating is lowered because the country is struggling to pay its debts - so the bankers charge them more money on the loans, making it more difficult to pay. This is what is called Loan Sharking in the world inhabited by the individual. My bank refuses me credit, so I'm forced to go to a Loan Shark to get the money I need for some (Hopefully seriously important) expense I must meet and not just another luxury splurge. From the bank I might have had to pay a loan interest rate of - say - 10%, but the loan shark charges 30% per month. So my thousand pound loan will now cost me 3,600 plus the original 1,000 if I pay it back inside twelve months instead of a smaller 1,100 at the bank. Doesn't sound like much, until you ask the question, why was my rating low to begin with. Simple, I already had a number of large debts, so I had a poor credit rating, which in turns means I was already paying off a large amount of interest each month and now the Loan Shark doubles it ...

There is this thought about these National Ratings running through my head, that suggests the change may have both a political and a profit motive. First, all Western currencies are under pressure at the moment, and all for similar reasons, hand-outs exceed tax revenue, so they've borrowed to the hilt to meet their expenses. All ten of the nations now hit with lower ratings are in the €urozone, so this hits the €uro, driving its value down and presumably driving others up. That is further exacerbated by the down grading of the "Rescue Package" set up to underpin some of the economies now down graded. Who benefits? As the saying is, "Follow the money." Standard and Poor's are based in the US, managed by bankers in the US. Devaluing the €uro improves the value of the US$ without having to do much more than change a few numbers and letters in the international banking network of computers feeding the markets. That's the political aspect.

There is a more serious financial one. All these countries now face an increase in interest charges against their loans. Who wins on that one? Ah, the lenders of course, who also happen to be the same people who set up companies like Standard and Poor's in the first place. So now the countries face not only swinging loan redemption payments, but some pretty swinging increases in interest payments as well. If the austerity measures weren't hurting the populations of those countries before, watch them bite now!

As the spokesman for Standard and Poor's said, no one outside their organisation could possibly understand the manner in which they make the calculations which result in the ratings, but he then added that they were "100% accurate, no, make that 150%."

Is it just me, or does the spokesman really not understand that you cannot have 150% of anything? If he doesn't understand that small fact, how much reliance can we place on his "calculations?"

1 comment:

  1. How accurate your assessment is.

    In the closing chapters if "The Girl with the Dragon Tattoo" the central figure remarks on a stock market crash by telling the reporter not to confuse finance with economy. He suggests that the Swedish economy had not been affected because Erikson were still producing phones, Volvo producing cars and trucks, the Baltic was full of freighters carrying ores for export, therefore the economy that day was as strong as the day before. What had changed was the stock market, the gamblers had decided to move their stakes elsewhere as the result of someone having been found out doing bad things.

    On a separate note, my Grandfather worked in retail nearly all of his life ending in a fairly senior position in an early supermarket company. He maintained until his (early) death that 100% profit is impossible, even if your only input is stress or sweat, it is an input, therefore it should be removed from the total before a percentage is calculated. Therefore if you buy for £1 and sell for £2, the profit is notionally 50% (i.e. you have 2 pounds, one of which you did not originally have) however, in reality it is <50% as you had to do some work, however minimal to facilitate the transaction.

    The world will be a better place when we measure our value in terms of goods and services provided and not in hypothetical paper chases where electronic money is shuffled from one account to another. I long for that day.