|S&P downgrades itself|
|Wednesday, 24 August 2011 00:00|
Though S&P insiders are putting out the view that the decision of its president Deven Sharma to step down was in the works for the past six months—after S&P owner McGraw-Hill split its data, pricing and analytics division from the ratings one, this left Sharma with much less to do—it’s difficult to believe the US government’s pressure had no role. Indeed, it is difficult to reconcile this explanation with the fact that, on Monday, two of McGraw-Hill’s shareholders had a meeting with company officials and said the rating firm needed a “well-known independent oversight figure to help manage increasingly complex global regulatory landscape and improve dialogue with investors, regulators and the public”. The two investors, hedge fund Jana Partners LLC and the Ontario Teachers’ Pension Plan collectively own 5.6% of McGraw-Hill and would naturally be worried about the statements coming out of the US government after the downgrade—given that McGraw-Hill has been buying back part of its shares for many months now to please investors, this would suggest it would pay great heed to such suggestions by large investor groups.
It is true, as US Treasury secretary Tim Geithner said after the downgrade, that S&P had got its maths wrong—it got the US 2021 debt projections wrong by $2 trillion, or 8%. It is also true, as others have pointed out, that given the dollar’s status as the global reserve currency, the US is unlikely to default on loans. But what triggered S&P’s fears was the fact that a significant number of US politicians actually wanted a default to take place and, two, at 99% of GDP, the US debt burden was getting oppressive, especially in the face of a slowing in US growth for a protracted period of time. Indeed, as FE columnist K Vaidya Nathan pointed out using US government data (http://www.financialexpress.com/news/column-the-big-gaap-in-us-debt-numbers/829649/), the actual US debt is more like $52 trillion once you take into account the shortfall in the funding for Medicare and Social Security, among others—that’s more than three times the publicly cited figure. So, the technicalities of reserve currencies aside, or the absurdity that countries in Europe that are in worse shape have a higher rating than the US, the fact is the US is not in great financial shape and this is what the downgrade reflected.
S&P, of course, is not the only one trying to sell the story that Sharma’s stepping down after the US downgrade was a coincidence, the US government has been doing much the same. Soon after the downgrade, reports surfaced saying both the SEC and the Justice Department in the US were investigating S&P—while the former was looking to see if the downgrade information had been leaked beforehand, the latter was examining the process of rating mortgage-backed securities that had triggered the 2008 financial crisis. All the while, the US government made it appear the actions were unconnected. Given the timing, it does appear Sharma has been sacrificed in the hope of lenient treatment from the US authorities. S&P has just downgraded itself.