Ratings given by rating agencies how much of it is true

 

 

For long whenever you read a business part of the paper you will notice that so and so agency has downgraded India from B+ to B- or from CCC+ to CCC-.  Many of us are curious what these ratings mean and do they really affect us.  I don't know about us but it surely affects the economists and the bureaucrats running the economy and finance of this country.

 

 

The prices of Petrol were Rs.43.49 in 2005 and as of today it is Rs.74.43 in Mumbai.  One thing I agree is the world oil prices are fluctuating but when the oil prices were at all time low from October, 2011 to July, 2012, the oil marketing companies or the finance ministry didn't revise the prices.    However in recent months the prices have been revised upwards thrice and downwards twice.  The prices of diesel and LPG were raised last year bowing to the wishes of the rating agencies like S & P or Moody's who warned the Indian economy of a likely downgrade if the current account deficit (CAD) balloons out of proportion.  The reason for ballooning CAD was largely due to subsidies.

 

However my query is quite simple.  China for last decade or so has always under priced its Remnbi to US dollar, yet nobody from the ratings agencies warns them about a ratings downgrade.  As of today Remnbi is most controlled currency in the world.  The US government from time to time pays some lip service about how the under priced Remnbi is hurting the US economy, but go no further than that.  However if Venezuela or Cuba or Iran argue something, US administration is quick to slap sanctions against them. 

 

Why not China?  Because as of today China holds the largest amount of American Treasury Notes.  1161.5 Billion USD as of October 2012 to be precise.  To put the China's ownership of U.S. debt in perspective, its holding of $1.2 trillion is even larger than the amount held by all American citizens put together at  $ 959 Billion.  And this is as per  official Federal Reserve Report.

 

Therefore any move to antagonise China will make them offload their holding and in that scenario with so much Treasury notes in the market, US is sure to go into a big big recession. 

 

This is the primary reason why the major ratings agencies don't go after China.  Majority of these rating firms are listed in US markets and also have their own hedge funds.  So it is in their interest to keep their noses clean about China.

 

So who else than is left to rate,  there are a few countries around the world who are particularly bashed by the ratings agencies.  Since the beginning of Euro crisis these are mainly Greece, Switzerland, France, Spain, Italy etc.  Of the third world countries India is their favourite bashing boy. 

 

What were these very agencies doing in 2008 :  In 2008, the world went through a shock as company after company went bankrupt.  First in the queue was Lehman Bros.  The same agencies which are downgrading India now were head over top in giving best rating possible to Lehman and AIG the two companies which when bankrupt.  Moody's, Standard & Poor's and Fitch ratings all maintained at least A rating on AIR and Lehman Brothers until both broke down.  Lehman Brothers declared bankruptcy on 15th Sept 2008 and AIG was provided bailout by US Government next day. 

 

In the Congressional hearing held to look into the worst collapse in US history, the head of above ratings agencies admitted that they have not taken any disciplinary action against their analysts for giving positive, investment-grade ratings to AIG and Lehman Bros up until their collapse. 

 

Further these very rating agencies were also giving investment grade ratings to Fannie Mae and Freddie Mac till the time of their bailout by US Federal Reserve. 

 

Therefore I distrust these Stanford and Harvard educated analyst in these rating agencies for making any ratings about India or for that matter China.  Those rating agencies who couldn't see a downfall of their own companies in their own backyard can't be expected to rate anybody else.

 

India and China are growing despite and inspite of a slowdown in world economy due to their own internal growth engines.  Both have a structurally strong economy led by good central banks.  And both are in long run going to overtake major economies of the world. 

 

Hence I request the economist and the bureaucrats to deter from taking any decision about the economy based on these silly rating agencies who can't even predict their own downfall.

 

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Vijay Prabhu