cover story
The answer given by either Standard & Poor’s (S&P), Moody’s or Fitch is usually: “That self-same democrati- cally elected government that paid us for our opinion on the health or otherwise of its economy.” So ladies and gents: Ireland, Portugal or Greece’s
departments of finance are handing over scarce tax- payer money to be told that they are doing an awful job and, in doing so, are accelerating the need for draconian tax rises and spending cuts in their own countries. Of course, that reporter was pretty lucky to get to ask
such a question in the first place. CRAs are not usually very chatty people on live TV. They only talk when they publish a new opinion on a bond, and even then they won’t take questions on tangential issues to that bond. If Moody’s says that it’s downgrading Ireland, it won’t take speculative questions on Portugal or Spain or Greece or Japan. CRAs have now joined the lexicon of words, acronyms
or phrases that most people outside banking and finance had never heard of five years ago. Hands up who, in 2006 amidst the boom, knew what ‘securitisation’, ‘quantita- tive easing’, ‘sovereign debt’ or ‘credit default swaps’ meant? We’ve had to learn them all on the hoof and only
because these and many other phrases have been the punctuation points to the all-but economic collapse of so many countries and companies since 2008.
Judge and jury But while governments have fallen, companies disap- peared and regulators humiliated, one group of actors in
this grizzly play continues to live on and play a huge role in the bloody aftermath of the financial crisis: CRAs. CRAs are often judge and jury as their pronounce-
ments move the market to such an extent as to become self-fulfilling prophecies. Just ask politicians in Greece, Ireland and now
Portugal. Once the CRAs pontificate that they don’t like the direction of a specific country, the markets will ‘sell’ that country by marking up the cost of borrowing and accelerate and/or magnify issues that might have been manageable up to the original downgrade. No doubt the two Brians – Messrs Cowen and
Lenihan – will use their valedictory and soon-to-be well-publicised books after the Irish General Election to expound on the above point. In their simplest form CRAs have a very easy job.
They must give a probability – or ‘rating’ – for the like- lihood of a corporate or sovereign bond not being repaid in full and on time. It’s a binary outcome. It either defaults (one) or it doesn’t (zero). Of course, there’s nothing black and white about their
ratings system at all. There are a lot of factors that go into the various gradients between AAA and ‘junk’. But if you are triple-A rated, the CRAs think that it’s very improbable that you’ll default. If you are BBB (triple B) you’re probably expected to default. Default, by the way, covers all types of options that
Greece and Ireland are now privately contemplating, ie ‘restructuring’, ‘rescheduling’, ‘debt for equity swaps’, postponement or the recently popular in Ireland: ‘renegotiation’.
‘If you are triple-A rated, the CRAs think that it’s very improbable that you’ll default. If you are BBB (triple B) you’re probably expected to default’
16 Irish Director Spring 2011
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