Michael Burke: Moody's ratings' agency has just downgraded Irish government debt. The move brings it into line with the other agencies' assessments. The Irish Times reports that a combination of factors is involved including liabilities arsing from the bank bailout, weak growth prospects and and a substantial increase in the debt/GDP ratio.
However, Dietmar Hornung, Moody's lead analyst for Ireland, was a bit more categorical. He said, "Today’s downgrade is primarily driven by the Irish government’s gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability." So, while there are a serious of contributory elements, the downgrade is primarily a function of the weakness of government finances, highlighted by deteriorating debt affordability.
The weakness of taxation revenues reflects the ongoing weakness of the domestic economy- the sector that the government chooses to tax. But the affordability of debt is no less serious. As existing debt government debt matures it has to be replaced by new debt issuance, and, now at higher interest rates. At the same time, borrowing is required to meet the tax-induced widening of the deficit. On top of this, the government, who can in no way risk the country's international reputation by borrowing a cent for investment purposes, can repeatedly find the resources to provide further bank bailouts.
All of this is leading towards disastrous outcomes. This is reflected in the market interest rates on government debt, and does not support the idea widely promoted that the economy is being rewarded for its fiscal austerity drive.
The market interest rate on Irish 10yr government debt is now 5.5%. By comparison the market interest rate on German 10yr government debt is 2.59% and Spain's 10yr debt yields 4.62%.
So, a €10bn 10yr bond issued by NTMA would cost, more or less, €15.5bn in interest and debt repayments over the life of the bond, whereas it would cost the German Treasury €12.6bn, Spain €14.6bn. There are auctions of Irish government debt scheduled for tomorrow, where we will see how great these 'rewards' are.
Worse, the combination of extremely high deficits and economic contraction is pushing the debt burden ever higher. ESRI is forecasting that general government debt will increase by 20% of GDP this year and 8% next. In the impossible event that no new deficits were incurred thereafter, the domestic (taxed) part of the economy would have to grow at 5.5% in nominal terms simply to keep pace with interest costs. The ESRI forecasts for GNP are for a cumulative fall in nominal GNP of 0.5% over the next two years.
If any business were obliged to borrow at above its competitors' rates, it would ensure that there was a significant positive return on that borrowing. That would be the only way to ensure solvency. Luckily, there is a slew of productive investments that can be undertaken that yield an economic and fiscal return way above the break-even level of 5.5%. They are set out in the NDP. In the Mid-Term Evaluation of the National Development Plan (Fitzgerald & Morgenroth) it places the average annual return on investment at between 14% and 18%, depending on the composition of the investment. If the obligation is to borrow at 5.5%, it makes sense to invest only where there is a much higher return. Investment in the areas, sectors and projects identified by the NDP would close the deficit.
Showing posts with label credit ratings. Show all posts
Showing posts with label credit ratings. Show all posts
Monday, 19 July 2010
Wednesday, 5 August 2009
Social welfare cuts and NAMA
Peter Connell: Brian Lenihan is quoted in Saturday’s Irish Times as insisting that the banking crisis is ‘entirely separate’ to the financial crisis. This is patently untrue. It represents an attempt to decouple the two issues as the government realises that the simultaneous cuts in public spending that will form a large part of the December budget, and the bailing out of the banks via the NAMA gamble, will be politically toxic.
What links the financial and banking crises (Lenihan omitted to mention the crises in unemployment, growing poverty and plummeting GNP and domestic demand) is the fiscal deficit and the national debt. The government, with the support of the Dublin Consensus, regard these as setting the framework for all policy discussion relating to how the country can emerge from the crisis. Colm McCarty has helpfully provided the media with a shorthand for describing this with his pithy ‘€400 million a week’ catchphrase. David Murphy, RTE’s Business Correspondent, simplified things even further for us by stating that the government is ‘losing €400 million a week’. On the same Morning Ireland programme, he suggested we’re in the same position as a spendthrift teenager blowing his pocket money. The bond markets (our parents!) look on and are not impressed. Add in the wheeze of publishing ‘Ireland’s Debt Clock’, where ‘you can see Ireland’s debt mount before your own eyes’, and the case for slashing public spending seems irrefutable.
One of the saner voices in the national media over the past few weeks has been Dr. Michael Somers, director of the NTMA. The NTMA’s annual report for 2008 makes for very interesting reading and, in some respects, is a useful antidote to the wilder outpourings of the dismal scientists. The report doesn’t underestimate the scale of the rapid growth in the state’s indebtedness. What it does do, though, is set this financial crisis in context. Here are a few snippets from the report that are worth airing:
• the National Debt increased from €37.6 billion at end 2007 to €50.4 billion at end 2008. The National Debt/GNP ratio increased from 23.3 per cent at end 2007 to 32.2 per cent at end 2008.
• the General Government Debt/GDP ratio stood at 43.2 per cent at end 2008, up from 25 per cent at end 2007. This was well below the euro area average of 69.3 per cent. The General Government Debt measure does not allow the €21.4 billion in Exchequer cash balances (more than 10 per cent of GDP) to be offset against the gross position.
• deducting the value of the National Pensions Reserve Fund and other funds managed by the NTMA from the gross debt would give a Debt/GDP ratio of around 33 per cent at end 2008. Subtracting Exchequer cash balances reduces the ratio further to 23 per cent. (None of this is reflected in our debt clock).
• forecast debt ratios for 2009–2013, accepting for the moment the figures set by the Department of Finance in the April budget, would see the Gross Debt/GDP ratio rise to 77% (or 73% allowing for cash balances). Both of these figures would be well below the EU average.
• interest payments on the debt were 3.8 per cent of tax revenue in 2008; the equivalent figure was 26.7 per cent when the NTMA was established in 1990. In 2009 the forecast is for 9.4 per cent of tax revenue, reflecting higher interest costs on a larger debt and lower tax revenues. While the interest burden will increase substantially over the period 2009–13, it will be no greater than the levels experienced in the mid-1990s.
Allowing for the fact that the government’s projections for economic growth and tax revenue are almost certainly optimistic, it’s quite clear that the scale of the debt, while serious, is manageable in the medium term. And this is according to Michael Somers.
On the other hand, the Dublin Consensus and the ‘€400 million a week brigade’ insist that our international credit rating is slipping and point to reports issued over the summer by Standard & Poor’s, Moody’s and others, using this as a rationale for swingeing cuts in public spending. What’s interesting in these reports is the focus on the banking crisis and NAMA. Standard & Poor’s very explicitly links the downgrading of Ireland’s rating from AA+ to AA to the enormous risks associated with NAMA – ‘We consider that NAMA's ability to meet its financial objectives is uncertain because of the risk that cash flows from its assets could fall below its funding costs if their underlying performance worsens compared with NAMA's expectations at the time of purchase. At the same time, we believe the recently announced losses (for the six months to the end of March 2009) at nationalized Anglo Irish Bank Corp. Ltd. (A-/Watch Neg/A-1) highlight both the continued fragility of the Irish banking sector and its reliance on the government for ongoing financial support.’
As the government formulates the December budget during the autumn, and we’re repeatedly told that the country can no longer afford current levels of welfare spending, ministers will desperately seek to disguise the fundamental link between our fiscal and banking crises. And if the budget does implement those cuts then a bright light needs to shine on that grubby transaction that will see money taken from the unemployed to prop up our profligate banks.
What links the financial and banking crises (Lenihan omitted to mention the crises in unemployment, growing poverty and plummeting GNP and domestic demand) is the fiscal deficit and the national debt. The government, with the support of the Dublin Consensus, regard these as setting the framework for all policy discussion relating to how the country can emerge from the crisis. Colm McCarty has helpfully provided the media with a shorthand for describing this with his pithy ‘€400 million a week’ catchphrase. David Murphy, RTE’s Business Correspondent, simplified things even further for us by stating that the government is ‘losing €400 million a week’. On the same Morning Ireland programme, he suggested we’re in the same position as a spendthrift teenager blowing his pocket money. The bond markets (our parents!) look on and are not impressed. Add in the wheeze of publishing ‘Ireland’s Debt Clock’, where ‘you can see Ireland’s debt mount before your own eyes’, and the case for slashing public spending seems irrefutable.
One of the saner voices in the national media over the past few weeks has been Dr. Michael Somers, director of the NTMA. The NTMA’s annual report for 2008 makes for very interesting reading and, in some respects, is a useful antidote to the wilder outpourings of the dismal scientists. The report doesn’t underestimate the scale of the rapid growth in the state’s indebtedness. What it does do, though, is set this financial crisis in context. Here are a few snippets from the report that are worth airing:
• the National Debt increased from €37.6 billion at end 2007 to €50.4 billion at end 2008. The National Debt/GNP ratio increased from 23.3 per cent at end 2007 to 32.2 per cent at end 2008.
• the General Government Debt/GDP ratio stood at 43.2 per cent at end 2008, up from 25 per cent at end 2007. This was well below the euro area average of 69.3 per cent. The General Government Debt measure does not allow the €21.4 billion in Exchequer cash balances (more than 10 per cent of GDP) to be offset against the gross position.
• deducting the value of the National Pensions Reserve Fund and other funds managed by the NTMA from the gross debt would give a Debt/GDP ratio of around 33 per cent at end 2008. Subtracting Exchequer cash balances reduces the ratio further to 23 per cent. (None of this is reflected in our debt clock).
• forecast debt ratios for 2009–2013, accepting for the moment the figures set by the Department of Finance in the April budget, would see the Gross Debt/GDP ratio rise to 77% (or 73% allowing for cash balances). Both of these figures would be well below the EU average.
• interest payments on the debt were 3.8 per cent of tax revenue in 2008; the equivalent figure was 26.7 per cent when the NTMA was established in 1990. In 2009 the forecast is for 9.4 per cent of tax revenue, reflecting higher interest costs on a larger debt and lower tax revenues. While the interest burden will increase substantially over the period 2009–13, it will be no greater than the levels experienced in the mid-1990s.
Allowing for the fact that the government’s projections for economic growth and tax revenue are almost certainly optimistic, it’s quite clear that the scale of the debt, while serious, is manageable in the medium term. And this is according to Michael Somers.
On the other hand, the Dublin Consensus and the ‘€400 million a week brigade’ insist that our international credit rating is slipping and point to reports issued over the summer by Standard & Poor’s, Moody’s and others, using this as a rationale for swingeing cuts in public spending. What’s interesting in these reports is the focus on the banking crisis and NAMA. Standard & Poor’s very explicitly links the downgrading of Ireland’s rating from AA+ to AA to the enormous risks associated with NAMA – ‘We consider that NAMA's ability to meet its financial objectives is uncertain because of the risk that cash flows from its assets could fall below its funding costs if their underlying performance worsens compared with NAMA's expectations at the time of purchase. At the same time, we believe the recently announced losses (for the six months to the end of March 2009) at nationalized Anglo Irish Bank Corp. Ltd. (A-/Watch Neg/A-1) highlight both the continued fragility of the Irish banking sector and its reliance on the government for ongoing financial support.’
As the government formulates the December budget during the autumn, and we’re repeatedly told that the country can no longer afford current levels of welfare spending, ministers will desperately seek to disguise the fundamental link between our fiscal and banking crises. And if the budget does implement those cuts then a bright light needs to shine on that grubby transaction that will see money taken from the unemployed to prop up our profligate banks.
Monday, 8 June 2009
Credit Rating Agencies are Punks!
Paul Sweeney: Ireland’s sovereign credit ratings were cut for the second time in just three months on Monday 8th June 2009 because of concern about the soaring cost of bailing out the country’s ailing banking sector.
Standard and Poor’s has cut Ireland’s long-term sovereign credit ratings to double-A with a negative outlook. It was double-A plus. Ireland had lost its prized top-notch triple-A rating in March.
S&P also warned that Ireland could suffer further downgrades should the banking system deteriorate further.
But who are these rating agencies? They are private corporations whose bosses are paid in much the same way as the CEOs of most MNCs – by pumping up share (or other) values. S&P, Moodys and Fitches are the major ones and these are the same rating bodies that labeled junk loans as AAA rated. The buffoons in the banks, who should have know better, trusted these three agencies and bought vast sums of junk debts, paid much too much for it. Now and for many decades to come the taxpayers of the world bail out their mistakes. In the meantime, the rating agencies push up the price of money for us by cutting our countries’ ratings. Are they still getting it seriously wrong?
In the US, instead of being punished for their enormous economic crimes, S&P, Moodys and Fitches have been rewarded for bad behavior (just like the banks with state rescues). The US Federal Reserve will now only accept collateral for its Term Asset-backed Loan Facilities (TALF) if it has been rubber stamped by one of the major rating agencies, i.e. one of the Nasty Trio. This upsets seven other rating agencies which have been recognised by the US SEC.
A year ago, Securities and Exchange Commission (SEC) concluded that the Credit Rating Agencies failed to properly manage conflicts of interest in assigning top ratings to bonds backed by subprime mortgages and other assets. It set new rules for governing the credit rating industry after its probe into the three big agencies, Standard & Poor's, Moody's Investors Service and Fitch Ratings.
While any casual listener to RTE knows the names of at least two of the Trio, few would know the names of the other seven. We are so used to reverential homilies from the Stockbroker Economists and financial commentariat on radio, groveling to the supposed pearls of wisdom from the Nasty Trio Rating Agencies, that we all know at least two of their names (Fitches is less well known, being newer).
It is estimated, according to the Economist, that fees of around $400m will be paid to the Nasty Trio of Rating Agencies for work as the exclusive club of “advisors” to the TALF. The Inspector General of the US government’s bank rescue wants the US Treasury to stop using rating agencies and to undertake the screening of loans itself. But the era of privatisation and outsourcing to incompetent private firms lives on, yet.
Angel Merkel, not a radical, called for a European credit ratings agency to balance the dominance of Moody's and S&Ps. "Europe has developed a certain independence thanks to the euro" but "in terms of the rules, the transparency guidelines and the entire standardisation of financial markets, we still have a strongly Anglo-Saxon-dominated system,” she said - last year!
Various authorities in Europe have been highly critical of the role of rating agencies in the credit crisis - especially of their facilitation of the boom in complex structured bonds. The European Commission and other bodies have been working to push through legislation before the European parliament to curb them and regulate them. Credit rating agencies might be regulated in Europe by a single body. Ratings for debt granted outside the EU would be endorsed by an EU-registered credit rating agency unless the third-country rating complies with an "equivalence criteria", meeting the standards set by the EU legislation. Not before time.
But industry insiders are fighting against such regulation and are opposed to Brussels' plans for regulating the credit rating agencies, arguing that they threaten to bring in financial protectionism in debt markets!
Internal emails from the Rating Agencies reveal a lot. They show that the rating service employees knew they were acting fraudulently. Employees at Moody's told executives that issuing dubious creditworthy ratings to mortgage-backed securities made it appear they were incompetent or "sold our soul to the devil for revenue,'' according to e-mails obtained by U.S. House investigators. The Securities and Exchange Commission last year found the credit-rating companies improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.
An e-mail that a S&P employee wrote to a co-worker in 2006, obtained by committee investigators, said, "Let's hope we are all wealthy and retired by the time this house of cards falters."
Here are emails from two unidentified Standard & Poor's officials which tell all. They are about a mortgage-backed security deal:-
“Official #1: Btw (by the way) that deal is ridiculous.
Official #2: I know right...model def (definitely) does not capture half the risk.
Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it.”
And yet government officials in sovereign nations still quake in their boots when these punks (what else are they?) make a pronouncement on our economic health!
Why government officials should still be in such awe of these discredited Ratings Agencies today tells us much about the subservient, cap-doffing, attitudes that still prevail in high places of government. Instead of groveling, sovereign nations should cooperate together on rating debt and make Credit Rating Agencies history!
Standard and Poor’s has cut Ireland’s long-term sovereign credit ratings to double-A with a negative outlook. It was double-A plus. Ireland had lost its prized top-notch triple-A rating in March.
S&P also warned that Ireland could suffer further downgrades should the banking system deteriorate further.
But who are these rating agencies? They are private corporations whose bosses are paid in much the same way as the CEOs of most MNCs – by pumping up share (or other) values. S&P, Moodys and Fitches are the major ones and these are the same rating bodies that labeled junk loans as AAA rated. The buffoons in the banks, who should have know better, trusted these three agencies and bought vast sums of junk debts, paid much too much for it. Now and for many decades to come the taxpayers of the world bail out their mistakes. In the meantime, the rating agencies push up the price of money for us by cutting our countries’ ratings. Are they still getting it seriously wrong?
In the US, instead of being punished for their enormous economic crimes, S&P, Moodys and Fitches have been rewarded for bad behavior (just like the banks with state rescues). The US Federal Reserve will now only accept collateral for its Term Asset-backed Loan Facilities (TALF) if it has been rubber stamped by one of the major rating agencies, i.e. one of the Nasty Trio. This upsets seven other rating agencies which have been recognised by the US SEC.
A year ago, Securities and Exchange Commission (SEC) concluded that the Credit Rating Agencies failed to properly manage conflicts of interest in assigning top ratings to bonds backed by subprime mortgages and other assets. It set new rules for governing the credit rating industry after its probe into the three big agencies, Standard & Poor's, Moody's Investors Service and Fitch Ratings.
While any casual listener to RTE knows the names of at least two of the Trio, few would know the names of the other seven. We are so used to reverential homilies from the Stockbroker Economists and financial commentariat on radio, groveling to the supposed pearls of wisdom from the Nasty Trio Rating Agencies, that we all know at least two of their names (Fitches is less well known, being newer).
It is estimated, according to the Economist, that fees of around $400m will be paid to the Nasty Trio of Rating Agencies for work as the exclusive club of “advisors” to the TALF. The Inspector General of the US government’s bank rescue wants the US Treasury to stop using rating agencies and to undertake the screening of loans itself. But the era of privatisation and outsourcing to incompetent private firms lives on, yet.
Angel Merkel, not a radical, called for a European credit ratings agency to balance the dominance of Moody's and S&Ps. "Europe has developed a certain independence thanks to the euro" but "in terms of the rules, the transparency guidelines and the entire standardisation of financial markets, we still have a strongly Anglo-Saxon-dominated system,” she said - last year!
Various authorities in Europe have been highly critical of the role of rating agencies in the credit crisis - especially of their facilitation of the boom in complex structured bonds. The European Commission and other bodies have been working to push through legislation before the European parliament to curb them and regulate them. Credit rating agencies might be regulated in Europe by a single body. Ratings for debt granted outside the EU would be endorsed by an EU-registered credit rating agency unless the third-country rating complies with an "equivalence criteria", meeting the standards set by the EU legislation. Not before time.
But industry insiders are fighting against such regulation and are opposed to Brussels' plans for regulating the credit rating agencies, arguing that they threaten to bring in financial protectionism in debt markets!
Internal emails from the Rating Agencies reveal a lot. They show that the rating service employees knew they were acting fraudulently. Employees at Moody's told executives that issuing dubious creditworthy ratings to mortgage-backed securities made it appear they were incompetent or "sold our soul to the devil for revenue,'' according to e-mails obtained by U.S. House investigators. The Securities and Exchange Commission last year found the credit-rating companies improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.
An e-mail that a S&P employee wrote to a co-worker in 2006, obtained by committee investigators, said, "Let's hope we are all wealthy and retired by the time this house of cards falters."
Here are emails from two unidentified Standard & Poor's officials which tell all. They are about a mortgage-backed security deal:-
“Official #1: Btw (by the way) that deal is ridiculous.
Official #2: I know right...model def (definitely) does not capture half the risk.
Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it.”
And yet government officials in sovereign nations still quake in their boots when these punks (what else are they?) make a pronouncement on our economic health!
Why government officials should still be in such awe of these discredited Ratings Agencies today tells us much about the subservient, cap-doffing, attitudes that still prevail in high places of government. Instead of groveling, sovereign nations should cooperate together on rating debt and make Credit Rating Agencies history!
Wednesday, 1 April 2009
Rating the Raters
‘Which is better, health or wealth?’, asks Cardinal Brady, RC Primate of Ireland. Standard and Poor’s (curious name) – the new shadow Government - seem to think otherwise.
Writing in today's Irish Times, Ciaran O'Hagan declares that 'The Prospects for the growth of wealth and income are the chief criteria used by rating agencies.' He was referring to Standard and Poor's downgrading of Ireland's AAA rating this week. And, like the Skibbereen Eagle, they are watching every move the Government will make next Tuesday.
Can anyone tell the exact criteria used by Agencies such as Standard and Poor’s? Some questions are in order:
- Do these ratings adjust for income inequality (recall Wilkinson’s sick societies hypothesis)?
- Do these ratings adjust for income sustainability (what was S&P saying before the bubble burst?)
- Who gets to set these ratings?
- Who rates the raters anyway?
It is worth citing what S&P themselves say about their ratings:
A Matter Of Opinion
“Standard & Poor’s ratings opinions are based on analysis by experienced professionals who evaluate and interpret information received from issuers and other available sources to form a considered opinion.
Unlike other types of opinions, such as, for example, those provided by doctors or lawyers, these ratings opinions are not intended to be a prognosis or recommendation. Instead, they are primarily intended to provide investors and market participants with information about the relative credit risk of issuers and individual debt issues that the agency rates.
Standard & Poor’s credit ratings opinions are also disseminated broadly and free of charge to recipients all over the world."
Subscribe to:
Posts (Atom)