S&P Warning or Warning About S&P Analysis?

The fact that S&P is now issuing a warning to all Euro countries regarding their sovereign ratings is not a surprise. All these governments are facing difficulty managing their fiscal policy so there is a potential risk in government bonds, a risk that maybe we have been ignoring for too long. And the behavior of S&P is consistent with their earlier practices: Japan or the US are not AAA in their ratings and they seem to like to make announcements around specific events so that people listen to what they have to say.

What is more surprising is that their announcement made it to the front page in all newspapers and seemed to be moving markets. I did not learn much from their announcement except that I confirmed my earlier impression that rating agencies have very little to say when it comes to sovereign debt. Their analysis is shallow and in many cases misleading or even wrong (e.g. in their recent calculations regarding the US fiscal outlook). They are also the same agency that was mispricing risk in the years previous to the crisis. I did a random search of their assessment of the mortgage risk market in 2006 and I found the following document regarding GMAC mortgage corporation:

The rankings for GMACM as a Residential Special Servicer and a Residential Subprime Servicer are affirmed at ABOVE AVERAGE. The rankings reflect the company’s experienced management team and staff, comprehensive and effective policies and procedures, pervasive internal control environment, sophisticated technology platform, and comprehensive standards for monitoring key performance metrics. GMACM continues to be a highly efficient loan servicer for a wide variety of residential mortgage loan products and investors. GMACM’s management team effectively minimizes portfolio risk through strong internal controls, well-defined risk management methodologies, proactive default management policies and practices, substantial technology enhancements, and effective business strategies. Management continues to execute its business paradigm of strategically aligning various servicing functions with its human capital resources to maximize servicing performance, develop platform-wide best practices, enhance technology, and minimize employee turnover through enhanced career-pathing opportunities. (January 2006)

Sounds good. Too bad that they had to be bailed out by the US government a couple of years later.

And S&P was also the same rating agency that was very pleased with fiscal policy in advanced economies during the years when it was really badly run (during the good years when we should have seen s healthy surplus).

And do not panic if they downgrade all the Euro government bonds, we still have Liechtenstein rated AAA. And if you get tired of government bonds you can invest in the gold market. Visit the S&P web site today and right there were they have their announcement on the warnings to Euro governments you can also find a great video explaining how Gold has dropped to a strong support area, picture below for your entertainment – I wondered if they used a similar graphical analysis to calculate the probability that the German government will default on its debt obligations.

About Antonio Fatás 136 Articles

Affiliation: INSEAD

Antonio Fatás is professor of Economics at INSEAD. He is a Research Fellow at the Centre for Economic and Policy Research in London and has worked as external consultant for international organizations such as the International Monetary Fund, the OECD and the World Bank.

He teaches the macroeconomics core course in the MBA program as well as different modules on the global macroeconomic environment in Executive Education. His research is focused on the study of business cycles, fiscal policy and the economics of European integration. His articles appear in academic journals such as the Quarterly Journal of Economics, Journal of Monetary Economics, Journal of Money, Credit and Banking, Journal of Public Economics, Journal of International Economics, Journal of Economic Growth, European Economic Review or Economic Policy.

Professor Fatás earned his M.A. and Ph.D. from Harvard University, and M.S. from Universidad de Valencia.

Visit: Antonio Fatás Blog, Personal Page

Be the first to comment

Leave a Reply

Your email address will not be published.


*