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Have rating agencies slipped again?
Tue, 14 Jun Pre-Open

Rating agencies have been accused of bailing out the 'Too Big To Fail' long before they were on the verge of bankruptcy. The agencies have known to be generous with select institutions. Especially ones that were large enough to keep the rating commissions ticking even in times of financial stress. Only when the companies failed to encash their notional assets and declared bankruptcy did their ratings slip. Such vested interests and opaque operations of rating agencies have been criticized even by the likes of Warren Buffett. In fact, Buffett pared his stake in Moody's soon after the crisis of 2008 and even admitted his mistake of investing in the firm.

But rating agencies have not yet learnt the lessons when it comes to sovereign ratings. Ratings for economies endowed with lower sovereign rating than the developed ones are more elastic. For instance India's ratings get downgraded at every hint of slippage in fiscal deficit levels. However, as the US policymakers themselves admit the chances of debt default, a rating downgrade is still doubtful. Legendry commodity investor Jim Rogers says that the ratings downgrade for the US is long overdue. In an interview to ET, Rogers claims his failure to understand what took Fitch so long to consider the downgrade. The fact that Rogers himself has been bearish on the US dollar for long confirms his view.

We believe that the callousness on the part of the US-bred ratings agencies is nothing but an attempt to keep a wide gap in borrowing rates. As long as the sovereign rating of the US remains far superior to that of the developing economies, the Fed can continue to lend cheap. The low risk associated with the US dollar brings the risk free rate for the economy near zero. At the same time, entities in economies that are fundamentally far more stable continue to pay a dearer price for their borrowings. Not that this attempt has helped the US pull its economy out from another recession. But it has certainly kept the hope for recovery alive.

But the days of AAA rating for the US are certainly numbered. As was the case with the Wall Street bankers who fooled the ratings agencies into deferring their opinions. Hence companies and investors looking for some honest opinions from the rating agencies need to do a reality check first.

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Jan 24, 2022 01:25 PM