Obama Attacks the Financial Market!
Don’t worry — this won’t be unpleasant!
Instead, it will be very interesting to know how the market will “run” the world. Last Monday evening, the shares of Standard & Poor’s lost 14 percent of their value on Wall Street (the New York Stock Exchange). Do you know why? It comes following the decision of the Obama administration, a couple of hours earlier, to sue the ratings agency.
The effect was immediate. Investors immediately shunned S&P. That’s how the mechanism of stock exchanges work. They are very sensitive. Shares work like “yo-yos” at the mercy of information. This is precisely why Obama criticized S&P. This is the same information given by the ratings agency that is, according to the American administration, at the root of the global financial and economic crisis which has swept the world since 2008. It is by these false ratings that the American housing market collapsed at the time, and the reason that everyone refers to the “Subprime Crisis.”
It is important to know that ratings have an overwhelming effect on stocks. One could also talk about the increased interest rates on debt for countries, which lose in the same way the confidence of international creditors, the impact on their currencies, etc. This explains the dirty game, in light of the American lawsuit, of ratings agencies, which distribute good and bad ratings according to problematic rules.
Some examples:
On Aug. 6, 2011, to everyone’s surprise, S&P degraded the rating of the United States from AAA (which it has had since the creation of the financial rating system in 1917) to AA+. Panic. The U.S. Treasury reacted immediately and reported a serious miscalculation made by S&P. The agency in question recognized the error, but maintains, despite everything, its degradation. Another example occurred on Nov. 10, 2011, when S&P announced that France lost its triple-A rating. The next day, the agency reversed its decision, recognizing its “technical error.” We say that the error was “political.” S&P had to have been seriously reprimanded to have acted thus six months from the French presidential election.
The same problem is suffered by the Obama administration — not the United States as a country — not to mention the case of Greece, which everyone already knows. It experienced the same degradation in the ‘30s. Every country in the world, rich or poor, borrows on the international market. Those that are poorly rated cannot find lenders except at very high interest rates. This is called debt service, which we have known in Algeria since the mid-‘80s. Our resources barely allowed us to pay this “service” while our debt (principal) continues to grow.
Clearly, ratings agencies (the three most influential in the world) are weapons against which the world has not yet invented the means to defend itself. A country in recession can be led to chaos, and even “brought to its knees.” It finds itself in the same state as a human being in poverty and moreover in debt. Beyond this trial, which will be interesting to follow, this affair reminds us Algerians of the immense relief of having escaped the grip of these ratings agencies. We escaped thanks to (we never remember it enough) the clairvoyance of our president of the republic who, in 2006, decided to repay the entire sum of our public debt. If he hadn’t done that, God only knows what state we would be in today. Obama has given us a good opportunity — one by which to better appreciate our debt-free situation!
Instead, it will be very interesting to know how the market will “run” the world. Last Monday evening, the shares of Standard & Poor’s lost 14 percent of their value on Wall Street (the New York Stock Exchange). Do you know why? It comes following the decision of the Obama administration, a couple of hours earlier, to sue the ratings agency.
The effect was immediate. Investors immediately shunned S&P. That’s how the mechanism of stock exchanges work. They are very sensitive. Shares work like “yo-yos” at the mercy of information. This is precisely why Obama criticized S&P. This is the same information given by the ratings agency that is, according to the American administration, at the root of the global financial and economic crisis which has swept the world since 2008. It is by these false ratings that the American housing market collapsed at the time, and the reason that everyone refers to the “Subprime Crisis.”
It is important to know that ratings have an overwhelming effect on stocks. One could also talk about the increased interest rates on debt for countries, which lose in the same way the confidence of international creditors, the impact on their currencies, etc. This explains the dirty game, in light of the American lawsuit, of ratings agencies, which distribute good and bad ratings according to problematic rules.
Some examples:
On Aug. 6, 2011, to everyone’s surprise, S&P degraded the rating of the United States from AAA (which it has had since the creation of the financial rating system in 1917) to AA+. Panic. The U.S. Treasury reacted immediately and reported a serious miscalculation made by S&P. The agency in question recognized the error, but maintains, despite everything, its degradation. Another example occurred on Nov. 10, 2011, when S&P announced that France lost its triple-A rating. The next day, the agency reversed its decision, recognizing its “technical error.” We say that the error was “political.” S&P had to have been seriously reprimanded to have acted thus six months from the French presidential election.
The same problem is suffered by the Obama administration — not the United States as a country — not to mention the case of Greece, which everyone already knows. It experienced the same degradation in the ‘30s. Every country in the world, rich or poor, borrows on the international market. Those that are poorly rated cannot find lenders except at very high interest rates. This is called debt service, which we have known in Algeria since the mid-‘80s. Our resources barely allowed us to pay this “service” while our debt (principal) continues to grow.
Clearly, ratings agencies (the three most influential in the world) are weapons against which the world has not yet invented the means to defend itself. A country in recession can be led to chaos, and even “brought to its knees.” It finds itself in the same state as a human being in poverty and moreover in debt. Beyond this trial, which will be interesting to follow, this affair reminds us Algerians of the immense relief of having escaped the grip of these ratings agencies. We escaped thanks to (we never remember it enough) the clairvoyance of our president of the republic who, in 2006, decided to repay the entire sum of our public debt. If he hadn’t done that, God only knows what state we would be in today. Obama has given us a good opportunity — one by which to better appreciate our debt-free situation!