As 2020 has ushered in a new era in both monetary and fiscal policy, so too do the big ratings agencies now occupy a very different position from days gone by.
Pre-COVID, a ratings downgrade was something all Australian policymakers lived in fear of, as indicating poor fiscal discipline or catastrophic economic management. Now — well, who cares (unless you’re News Corp title and you want to attack Daniel Andrews).
S&P, among the three main credit raters, yesterday broke first and downgraded the standings of Victoria and NSW after their recent budgets revealed a rise in debt, a surge in spending, and no talk of a return to surplus any time soon.
Rival ratings agencies Moody’s and Fitch haven’t moved yet. Moody’s has the federal government’s rating as AAA stable. Fitch’s is AAA negative, like S&P. Moody’s is more inclined to look at the bigger economic picture in which governments operate.
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S&P are objecting to NSW and Victoria being proactive in trying to protect their people, businesses, core government services and infrastructure from long-term damage inflicted by recession.
It’s the sort of thinking that saw European economies and the US spend years in stagnation after the global financial crisis because governments withdrew stimulus. Ratings agencies have no way of valuing those efforts and their employees have no understanding of life in a real world where jobs, the ability to repay mortgages, access to basic services and the need to preserve the basic infrastructure of an economy are crucial.
Indeed, there’s a decided air of unreality to S&P’s view of the world: its rating for the United States — AA+ with a positive outlook — is wildly optimistic given that US debt and deficits are soaring. It finished the most recent fiscal year with a $3 trillion deficit.
Maybe S&P believe the extraordinary hypocrisy of congressional Republicans who, having helped Trump send the US deficit over a trillion dollars even before COVID, are suddenly saying they’re going to focus on cutting spending and maintain the existing debt ceiling, now that a Democrat has been elected president.
But the near-indifference that greeted S&P’s downgrades reflects the irrelevance of the ratings agencies currently. The downgrade theoretically penalises NSW and Victoria by forcing up their debt costs, given investors will want higher returns for their riskier debt. The reality is that in the present low/zero interest rate environment, both states will be knocked down in the rush by bond investors chasing yields.
Interest rates are going to remain at record lows for years to come. And both states can easily service their higher debts. And even were that not true, policymakers are now aware of the mistake of withdrawing stimulus too early (although the US gridlock and Trump’s incompetence means that’s exactly what’s unfolding in the US).
And while the screenjockeys at S&P are tut-tutting about debt, their employer is sending its own signal about how it regards the global economy.
S&P is part of a larger company, S&P Global, which wants to take over a rival data company, IHS Markit, for more than US$44 billion. But S&P Global is using its shares for the takeover, not cash and not raising debt, even at these record low interest rates.
When companies use their own shares to make big deals, its their existing shareholders who suffer. It’s also a good signal of the lack of confidence S&P Global has in the future and the ability of the combined company to service a pile of debt in future years in the current environment.
The takeover increases the range of services the combined company will be able to offer clients. The big challenge will be keeping the ratings independent of these extra (and higher profit margin) services. It’s a challenge that the big four accounting firms — which combine auditing and tax avoidance advice with more lucrative consulting services — have completely failed to manage in recent years.