'Credit rating agencies are redundant'
Economist Micha Astarchan believes public overestimates credit rating agencies. 'I didn't get the impression that they apply in-depth analysis'
Over the past weekend, S&P credit rating company came under a hailstorm of criticism following its decision to downgrade the United States' credit rating by a notch from a perfect AAA to AA+. The harshest criticism came from the President of the US himself Barak Obama, who attacked S&P's decision and claimed that the US credit rating was and is still perfect.
"There's no reason why credit rating agencies have to enjoy full credit from the public following their AAA rating of what in hindsight, should have been rated lower during the crisis. I did not get the impression that they apply in-depth analyses," says economist Micha Astarchan in an interview to Calcalist. He notes that "to say that the credit rating companies are redundant is an understatement."
Addressing the US rating downgrade, Astarchan tells Calcalist that "S&P's main claim is that Congress is resorting to wanton behavior to obtain political goals, and it's true. This indeed warrants the credit downgrade."
Interested in borrowers, not in countries with debt
Credit rating agencies analyze the ability of various bodies (e.g. states or companies) to meet their financial obligations to creditors. For this end, they frequently analyze the financial condition of such bodies according to fixed methodology – the more a body adheres to its fiscal framework and does not excessively increase its leveraging, the more its credit rating remains stable.
When a country is being rated, the agency applies a relatively simple method which is evocative of right wing economic doctrine: cut the deficit by reigning in the budget or in other words, reduce spending on one hand and cut the debt burden on the other hand in a scissors motion.
This approach does not always fall in line with the needs of the rated country, which is what happened with the US in the current rating affair. The crisis and ensuing recession catapulted the US unemployment rate which is now bearing down on the economy's ability to climb out of the recession. The Obama administration is aiming for a budget increase to step up the economy's activity and increase labor.
A budget increase calls for a higher debt ceiling – a fact which Congress and the Senate agreed on already last week – not before the Democrats and the Republicans turned the matter into their bone of contention – one of the reasons S&P set forth for the downgrade.
Astarchan objects to this kind of dry approach to adherence to budgetary frameworks. He argues that the rating agencies have no interest in the government's condition but in its ability to meet obligations to bondholders.
"The question is not whether the rating is of general benefit but whether it specifically helps bondholders because that is precisely what S&P wants to know – whether the government can meet the payment schedule."
"The answer is that it's not so self-evident," Astarchan explains to Calcalist."If we look at Greece, which is an extreme point in case, we can see that the government made far reaching cuts and still the country's economy is shrinking rapidly. Is this helping Greece repay its debts? In my opinion, the answer is absolutely not. The idea that by reducing the deficit you can improve solvency is in most cases mistaken."
Click here to read this report in Hebrew
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