Instrumentalization of Credit Rating Agencies
Standard and Poor’s 500 index decision to downgrade Russia’s rating is evidently not linked to any economic reason but can be perfectly explained from a political vantage point. To justify its decision, which henceforth fixes Russia’s rating at “BB+,” causing it to enter into the speculative category, this agency advanced the deterioration of the ruble’s flexibility and the degradation of the country’s growth perspective. Besides, the S&P 500 does not exclude the possibility of a subsequent downgrading. Nevertheless, the “rating” of a country depends on several parameters.
On What is This Rating Based?
First, it is based on the country’s solvency. Nevertheless, with public debt reaching nine percent of the gross domestic product — i.e., 10 times less than the U.S. — and a budget deficit in 2015 which should range between 0.7 and 1.5 percent of GDP, Russia appears to be particularly solvent. The sum of payments that Russian companies must honor to foreign creditors should not exceed $65 billion for 2015. What is more, the trade balance should range between $100 billion to $120 billion. Hence, Russian companies are generally highly solvent. One could object that growth perspectives are also taken into account, but if growth turns out to be negative in 2015, it should not exceed -1.5 percent. In reality, a sharp fall is expected in the first quarter, then a progressive stabilization in the second and third quarters and a return to growth in the last quarter. It is understandable that Russia is not rated AAA, but there are no economic grounds for it to be downgraded to “speculative risk.” There is no risk of default in Russia, a point of view shared implicitly by many financial market players.*
It should be noted that another global ratings agency named Fitch downgraded Russia from BBB to BBB- [NB: an omission in the original text] which is one notch before the default level. It is obvious that there is no economic rationale** behind this notation other than the political discredit enforced by the U.S. on the market vis-à-vis Russia. The latter will then be obliged to pay a supplementary cost evaluated between 20 billion euros and 30 billion euros in 2015. We can then consider that this arbitrary Russian downgrade corresponds to a misnamed sanction. It is indeed the opinion of Vassily Nebenzia, deputy minister for foreign affairs. It is to be noted that Russian Finance Minister Anton Siluanov considered that the rating agency had exercised “excessive pessimism,” suggesting the agency should “not dramatize things.”
The Dynamic of an Anti-Russian Hysteria
It is therefore clear that only political reasons can explain this downgrading. Besides, the Chinese agency Dragon Global Credit, on the contrary, conferred on Russia an excellent rate. If the U.S. is rated A-, then Russia stays with an A rate. It can be objected, of course, that Russia represents less risk than the U.S., but it is clear that on purely financial criteria, the A-range rating makes more sense than the one given by Fitch or S&P 500. Russian reserves are considerable: Either the ones owned by Russia Central Bank or the ones owned by the different sovereign funds managed by the Ministry of Finance.
This substantially raises the question of the rating agencies’ credibility. As long as debt trades will be running — public or private debts, that is — there will be a necessity to evaluate the borrower’s solvency. It is the fundamental reason behind the rating agencies. For that matter, their existence implies that political reasons do not intervene, or do so at least marginally, on their evaluation of a borrower’s solvency. By abiding with the political game run by the U.S., these agencies have compromised their general credibility.
The Long-Term Consequences of Anti-Russian Hysteria
At the same time, these agencies have withdrawn an important, albeit imperfect, instrument of evaluation and therefore functioning from the markets — and we remember the brutal about-face of these very agencies at the locus of the subprime crisis. Ultimately, this situation can only lead to the increasing fragmentation of the markets and a progressive reversal of the financial globalization trend. Indeed, if one cannot have readily available credible opinions about a borrower’s solvency, only the particular knowledge that can be given by the proximity shared with this very borrower can allow sound judgment of its real solvency. In return, this proximity requirement makes impossible any kind of globalized debts market, public or private. Inadvertently, the U.S. government might have delivered the coup-de-grace to global finance, the latter being still one of the main beneficiaries.
This situation underlines the highly perverse political dynamic of American politics, visible also in other domains, notably in its war on terror. The U.S. responsibility in the birth of what is called the Islamic State was highlighted by General Vincent Desportes’ testimony*** before the French Senate. Nevertheless, today, the U.S. looks at organizing a coalition aimed at fighting the very same Islamic State group that it brought into being. This incoherence can also be found in the policy that leads the U.S. to pressure rating agencies into downgrading Russia rates.
Lift Up a Large Stone to Have it Fall Back on One’s Feet (Chinese Saying)
While looking for local advantages, and here is an advantage vis-à-vis Russia, the U.S. does not hesitate to compromise instruments that are, or should be, considered as common wealth of which no market players can deprive others. The institution of ratings for borrowers was “common knowledge” which functioned as “common weal” on the international debts market. It is possible that we are witnessing the end of this “common weal” and with it the essential mechanism fueling the globalized market, which could advance financial fragmentation and the emergence of various currencies more or less convertible as financial instruments inside these fragmented areas. Will such an evolution be negative? Probably not for the emerging countries, not even for the majority of the world countries, but it will deliver the coup-de-grace to the power of big financial centers and therefore, as a fallout, the U.S..
* Editor’s Note: This footnote is included in the original article. “It is a bit of a mystery to us why Russian CDS spreads are so much lower than Greek ones, while Russian bond yields are significantly higher, cf. Pater Tenebrarum, Markets: Russia Is Not a Default Risk. Ukraine and Greece the Real Risks, 9/1/2015, http://www.acting-man.com/?p=35146et http://russia-insider.com/en/2015/01/13/2377.”
**Editor’s Note: This footnote is included in the original article. “It is indeed what Alexander Mercouri’s article in Russia Insider analyzes in detail: http://russia-insider.com/en/2015/01/11/2322.”
*** Editor’s Note: This footnote is included in the original article. “COMPTES RENDUS DE LA COMMISSION DESAFFAIRES ETRANGERES, DE LA DEFENSE ET DES FORCES ARMEES, « Débat en séance publique sur la prolongation de l'opération Chammal en Irak - Audition du Général de division (r) Vincent Desportes, professeur associé à Sciences Po Paris ». 20 janvier 2015, pp. 12-19, http://www.senat.fr/compte-rendu-commissions/20141215/etr.html#toc7“
On What is This Rating Based?
First, it is based on the country’s solvency. Nevertheless, with public debt reaching nine percent of the gross domestic product — i.e., 10 times less than the U.S. — and a budget deficit in 2015 which should range between 0.7 and 1.5 percent of GDP, Russia appears to be particularly solvent. The sum of payments that Russian companies must honor to foreign creditors should not exceed $65 billion for 2015. What is more, the trade balance should range between $100 billion to $120 billion. Hence, Russian companies are generally highly solvent. One could object that growth perspectives are also taken into account, but if growth turns out to be negative in 2015, it should not exceed -1.5 percent. In reality, a sharp fall is expected in the first quarter, then a progressive stabilization in the second and third quarters and a return to growth in the last quarter. It is understandable that Russia is not rated AAA, but there are no economic grounds for it to be downgraded to “speculative risk.” There is no risk of default in Russia, a point of view shared implicitly by many financial market players.*
It should be noted that another global ratings agency named Fitch downgraded Russia from BBB to BBB- [NB: an omission in the original text] which is one notch before the default level. It is obvious that there is no economic rationale** behind this notation other than the political discredit enforced by the U.S. on the market vis-à-vis Russia. The latter will then be obliged to pay a supplementary cost evaluated between 20 billion euros and 30 billion euros in 2015. We can then consider that this arbitrary Russian downgrade corresponds to a misnamed sanction. It is indeed the opinion of Vassily Nebenzia, deputy minister for foreign affairs. It is to be noted that Russian Finance Minister Anton Siluanov considered that the rating agency had exercised “excessive pessimism,” suggesting the agency should “not dramatize things.”
The Dynamic of an Anti-Russian Hysteria
It is therefore clear that only political reasons can explain this downgrading. Besides, the Chinese agency Dragon Global Credit, on the contrary, conferred on Russia an excellent rate. If the U.S. is rated A-, then Russia stays with an A rate. It can be objected, of course, that Russia represents less risk than the U.S., but it is clear that on purely financial criteria, the A-range rating makes more sense than the one given by Fitch or S&P 500. Russian reserves are considerable: Either the ones owned by Russia Central Bank or the ones owned by the different sovereign funds managed by the Ministry of Finance.
This substantially raises the question of the rating agencies’ credibility. As long as debt trades will be running — public or private debts, that is — there will be a necessity to evaluate the borrower’s solvency. It is the fundamental reason behind the rating agencies. For that matter, their existence implies that political reasons do not intervene, or do so at least marginally, on their evaluation of a borrower’s solvency. By abiding with the political game run by the U.S., these agencies have compromised their general credibility.
The Long-Term Consequences of Anti-Russian Hysteria
At the same time, these agencies have withdrawn an important, albeit imperfect, instrument of evaluation and therefore functioning from the markets — and we remember the brutal about-face of these very agencies at the locus of the subprime crisis. Ultimately, this situation can only lead to the increasing fragmentation of the markets and a progressive reversal of the financial globalization trend. Indeed, if one cannot have readily available credible opinions about a borrower’s solvency, only the particular knowledge that can be given by the proximity shared with this very borrower can allow sound judgment of its real solvency. In return, this proximity requirement makes impossible any kind of globalized debts market, public or private. Inadvertently, the U.S. government might have delivered the coup-de-grace to global finance, the latter being still one of the main beneficiaries.
This situation underlines the highly perverse political dynamic of American politics, visible also in other domains, notably in its war on terror. The U.S. responsibility in the birth of what is called the Islamic State was highlighted by General Vincent Desportes’ testimony*** before the French Senate. Nevertheless, today, the U.S. looks at organizing a coalition aimed at fighting the very same Islamic State group that it brought into being. This incoherence can also be found in the policy that leads the U.S. to pressure rating agencies into downgrading Russia rates.
Lift Up a Large Stone to Have it Fall Back on One’s Feet (Chinese Saying)
While looking for local advantages, and here is an advantage vis-à-vis Russia, the U.S. does not hesitate to compromise instruments that are, or should be, considered as common wealth of which no market players can deprive others. The institution of ratings for borrowers was “common knowledge” which functioned as “common weal” on the international debts market. It is possible that we are witnessing the end of this “common weal” and with it the essential mechanism fueling the globalized market, which could advance financial fragmentation and the emergence of various currencies more or less convertible as financial instruments inside these fragmented areas. Will such an evolution be negative? Probably not for the emerging countries, not even for the majority of the world countries, but it will deliver the coup-de-grace to the power of big financial centers and therefore, as a fallout, the U.S..
* Editor’s Note: This footnote is included in the original article. “It is a bit of a mystery to us why Russian CDS spreads are so much lower than Greek ones, while Russian bond yields are significantly higher, cf. Pater Tenebrarum, Markets: Russia Is Not a Default Risk. Ukraine and Greece the Real Risks, 9/1/2015, http://www.acting-man.com/?p=35146et http://russia-insider.com/en/2015/01/13/2377.”
**Editor’s Note: This footnote is included in the original article. “It is indeed what Alexander Mercouri’s article in Russia Insider analyzes in detail: http://russia-insider.com/en/2015/01/11/2322.”
*** Editor’s Note: This footnote is included in the original article. “COMPTES RENDUS DE LA COMMISSION DESAFFAIRES ETRANGERES, DE LA DEFENSE ET DES FORCES ARMEES, « Débat en séance publique sur la prolongation de l'opération Chammal en Irak - Audition du Général de division (r) Vincent Desportes, professeur associé à Sciences Po Paris ». 20 janvier 2015, pp. 12-19, http://www.senat.fr/compte-rendu-commissions/20141215/etr.html#toc7“