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The dollar’s human too PDF Print E-mail
Wednesday, 20 April 2011 00:00
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Rating agency S&P’s decision to revise its outlook on US debt to negative has important ramifications, more so if the ratings are actually lowered—in roughly half the 212 negative outlooks S&P has issued for sovereigns since 1989, the WSJ notes, over half have resulted in downgrades, and within six months of the downward revision in outlook. If that happens, the cost of US debt goes up, which is why gold prices rose immediately and yields on T-bills rose immediately—they later stabilised on the hope US policymakers would now get galvanised to do something about the deficit and debt, expected to rise to 112% of GDP by 2016 from 61% in 2006. The ramifications for India are not clear—funds flows to countries like India could rise, but the dollar weakening has other implications. The immediate reaction to the S&P move, of course, is one of surprise since the outlook hasn’t been revised from the time it was added to the ratings lexicon in 1989, to even when the US financial system looked as it was going to implode at the time of the Lehman collapse. The irony wasn’t lost when the PIGS continued to command a better rating than India even after defaulting. How unfair the ratings appear is best seen from the example of China; rated AA- with a stable outlook, its debt was 16.2% of GDP in 2006 and projected to reduce to 9.7% in 2016; the US is AAA with a negative outlook, its debt was 61.1% in 2006 and is projected to rise to 111.9% in 2016. Clearly the dollar being the reserve currency makes a difference as does the fact that, as S&P notes, the US is the most flexible of high-income countries, has adaptable labour markets and a track record of being open to capital flows.

 

All of which raises important questions. What are the yardsticks for making rating calls, should they be common across countries and, more important, should they be more transparent? Also, is it time to break the monopoly of the Big 3 rating agencies—the absence of competition today has created a virtual oligopolistic structure wherein only these three ratings matter. One may recollect that the Chinese rating agency Dagong had last year come out with its own series of ratings, that created a storm since the US got a AA with negative outlook, India, a BBB with a stable outlook and China varied between AA+ and AAA rating. The fact that these agencies use broad observations as part of a subjective analysis which may apply to other countries with different ratings makes this entire business quite opaque and difficult to assess. This needs to change.

Last Updated ( Wednesday, 30 November 2011 06:22 )
 

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