Standard and Poor’s as a political watchdog

By Emeka Chiakwelu

The emergence of S&P as a political watchdog may weaken trust and
confidence in the global market

There was a manifestation as Standard & Poor’s downgrade US credit rating
to ‘AA+’ from ‘AAA’ . The revelation is that the mandate of Standard &
Poor’s is beyond financial observation and evaluation but also political.
Among the numerous reasons given by S&P on the downgrading of the world
largest economy is its cumbersome political process and slow policy
formulation in Washington. Standard & Poor’s stated , “More broadly, the
downgrade reflects our view that the effectiveness, stability, and
predictability of American policy making and political institutions have
weakened at a time of ongoing fiscal and economic challenges to a degree
more than we envisioned when we assigned a negative outlook to the rating
on April 18, 2011.”

This latest development maybe beyond the agency’s mandate which is to
verify whether an entity be it a sovereign nation or corporation can meet
its financial obligations without default. In this case to verify whether
United States can redeem and pay interest on its treasury securities
without default. There are no signs that United States will default,
therefore the downgrade may not be logical and probably without merit.

S&P in a statement emphasized that, “The downgrade reflects our opinion
that the fiscal consolidation plan that Congress and the Administration
recently agreed to falls short of what, in our view, would be necessary to
stabilize the government’s medium-term debt dynamics.” Therefore this has
turned a financial agency into a political watchdog. As S&P journey into
this route, the prime ramification may connotes the waning of its grip on
the global market. Maybe the next time around China political structure
may come into question by S&P. That’s why it is necessary for S&P not to
go beyond its original mandate of evaluating the ability of a nation to
pay its bill.

The perceived notion of most people is that S & P is solely a credit
rating institution that relies on financial and economic evaluations to
make its decisions and overviews. But with the decision it made with the
downgrade shows that it has expanded its responsibility to become a
political watchdog. The agency has every right to do whatever their heart
desires but it is unfair to change the rules of the game at the heat of
the game. What S& P did to United States is unfair. There is no logic in
the downgrade of the global largest economy from its AAA to AA+. United
States is the anchor of global economy; it is the stabilizing fulcrum in
global market economy.

According to Wikipedia, “Standard & Poor’s (S&P) is a United States–based
financial-services company. It is a division of the McGraw-Hill Companies
that publishes financial research and analysis on stocks and bonds. It is
well known for its stock-market indices, the US-based S&P 500, the
Australian S&P/ASX 200, the Canadian S&P/TSX, the Italian S&P/MIB and
India’s S&P CNX Nifty. The company is one of the Big Three credit-rating
agencies, which also includes Moody’s Investor Service and Fitch Ratings.
As a credit-rating agency (CRA), the company issues credit ratings for the
debt of public and private corporations. It is one of several CRAs that
have been designated a nationally recognized statistical rating
organization by the U.S. Securities and Exchange Commission. It issues
both short-term and long-term credit ratings.”

The history of and about Standard and Poor’s never mentioned its political
quest, “With offices in 23 countries and a history that dates back more
than 150 years, Standard & Poor’s is known to investors worldwide as a
leader of financial- market intelligence. Today Standard & Poor’s strives
to provide investors who want to make better informed investment decisions
with market intelligence in the form of credit ratings, indices,
investment research and risk evaluations and solutions. Most notably, we
are known as an independent provider of credit ratings. In 2009, we
published more than 870,000 new and revised credits ratings. Currently,
we rate more than US$32 trillion in outstanding debt. Standard & Poor’s is
also widely known for maintaining one of the most widely followed indices
of large-cap American stocks: the S&P 500. In 2007, the S&P 500 celebrated
its 50th anniversary.”

It further explained its role with strong financial bearings,
“Additionally, the S&P Global 1200 covers approximately 30 markets
constituting approximately 70% of global market capitalization.
Approximately $1.1 trillion in investment assets is directly tied to S&P
indexes, and more than $3.5 trillion is benchmarked to the S&P 500 – more
than any other index in the world. Moreover, Standard & Poor’s independent
equity research business is among the world’s leading providers of
independent investment information, offering fundamental coverage on
approximately 2,000 stocks. We are also a leader in mutual fund
information and analysis.”

Standard and Poor’s should set up a political department that have the
best minds and analysts that can do it right, if it decides to add
politics as one of the factors to make credit rating decisions; at least
make an effort to do it right. US raucous policy making according to S&P
contributed to the downgrade and this have exposed the cluelessness of the
agency about the workings of Washington. The agency may have proven that
it does not understand United States political system. Standard & Poor’s
should once more be reminded that United States is a democratic system
with a functional congress and presidency. In the democratic system of
United States the president do not make political decision and impose it
to the congress and neither vice versa. In takes time to make decision,
sometimes with gridlocks because it was built into the system.

Therefore to downgrade US to AA+ is showing lacking of understanding of
United States especially the political structure and governance
methodology. The S & P may have weakened its global acceptance by its move
it made on US credit rating. The world economy is gradually coming out
from recession and everybody is feeling good about American leadership.
The whole world respects American leadership including China and European
Union. The Chinese products were open to American market and United States
played a constructive role in bailing out Greece from its financial mess.

No one is saying that United States will not adjust its spending, deficit
and debt. But United States has never defaulted in its financial
obligation since World War II. For since 1917 United States has been a AAA
nation. There is no sign that US will default on paying its interest on
its debt and there is no reason to think otherwise.

Standard & Poor’s inability to foresee subprime loan debacle at Wall
Street is not something to write home about. S&P may not be thorough and
efficient as it led many to believe, afterall many of the mortgage
security firms that were involved in the Wall street’s subprime loan
debacle were given high credit ratings.

“S&P and other ratings agencies reaped record profits as they bestowed
their highest ratings on bundles of troubled mortgage loans, which made
the mortgages appear less risky and thus more valuable. They failed to
anticipate the deterioration that would come in the housing market and
devastate the financial system. Companies and some countries — but not the
United States — pay the credit ratings agencies to receive a rating, the
financial market’s version of a seal of approval. Before the financial
crisis, banks shopped around to make sure rating agencies would award
favorable ratings before agreeing to work with them. These banks paid as
much as $100,000 for ratings on mortgage bond deals, according to the
Financial Crisis Inquiry Commission,the NY Times said. Critics say this
business model is riddled with conflicts of interest since ratings
agencies might make their grades more positive to please their customers,”
as reported by Usatoday.

Therefore S&P may have made a mistake too and overreach in downgrading US
credit rating to AA+. The Obama’s administration shows a great leadership
in finally bringing the congress to pass a bill to avert a default. But
for the S&P to turn around and downgrade it is not a prudent decision.
That is not the right way to get the attention of the policy makers in
Washington. The S&P may finally end up with a different result, it has
brought instability to stock market and Dow has plunged to more than 635
points in last Monday’s market and gyration continues. But thanks to the
rest of sensible marketers, traders and nations the treasury market was
even experiencing a surge. By this act the world is giving a thumbs up by
buying US securities in spite of S&P judgement.

Emeka Chiakwelu is the Principal Policy Strategist at Afripol
Organization. Africa Political and Economic Strategic Center (Afripol) is
foremost a public policy center whose fundamental objective is to broaden
the parameters of public policy debates in Africa. To advocate, promote
and encourage free enterprise, democracy, sustainable green environment,
human rights, conflict resolutions, transparency and probity in Africa.
http://afripol.org/

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