Appeasing the ratings agencies is bad policy
My eye was caught this morning by a story headlined – “Austerity Doesn’t Pay as Debt Markets Ignore Rating Cuts”.
It opens by discussing the impact of the government’s current policy on the supposedly ‘ring-fenced’ NHS:
Britain is forcing Stephen Jobling and his stroke patients to defend the nation’s AAA credit rating.
Staffing at the National Health Service hospital ward where Jobling works was reduced by about half in the U.K.’s deepest drive since World War II to shrink its deficit. The goal was to avoid losing the top credit score, which might risk higher interest expenses, according to the government of Conservative Prime Minister David Cameron.
“If they could see these people suffering while we have two members of nursing staff running round trying to wash, dress and feed 20 patients, they would think twice,” says Jobling, 27, a nurse at Lincoln County Hospital in eastern England. “You should be looking after your people. You shouldn’t be bothering about some credit agency from somewhere else.”
The bond market says he’s right. After Moody’s Investors Service issued a “negative” outlook for U.K. debt on Feb. 13,yields on government securities relative to benchmark U.S. Treasury debt fell over the next month, instead of rising.
The article then proceeds to quote a variety of eminent figures views on the rating agencies that government policy is aiming to appease.
Bank of England Governor Sir Meryn King – “I don’t think we should be slaves to the ratings agencies. What we’ve seen is, the action they took recently did actually have no impact on the yield that people in the market were willing to lend to the U.K. government at.””
Finance Professor John Hund – ratings agencies “have more potential to do harm than good. It’s hard for me to see their value.”
Nobel Prize winner Paul Krugman – ““Their austerity is leading to depressed economies, which is worsening fiscal prospects,” Krugman said in an interview May 9. “You’re kind of in an endless downward loop here, where you cut and the fiscal prospect looks worse, so to keep the rating agencies happy, you cut more.”
Former MPC member Danny Blanchflower – “How do you have any faith in them given they were part problem?”
Chief Economist at Bank of Tokyo-Mitsubishi UFJ Chris Rupkey – “It’s almost as if they’re trying to admonish the countries to get their financial books in order. They’re really doing the world a huge disservice by frightening financial markets.”
Most damningly, Vincent Truglia, a fund manager and former head of sovereign ratings at Moodys argues that – “The U.K. shouldn’t care at all what its rating is, a rating is not what you’re supposed to be interested in. You’re supposed to be interested in the right public policy.”
I couldn’t agree more. Targeting a credit rating rather than economic growth was always going to be self-defeating.
Perhaps the most interesting thing about this article though isn’t the contents but the source: Bloomberg. This is an article that will be read by financial professionals the world over, the very people the government is aiming to satisfy.
The final word though belongs to NIESR’s Jonathan Portes who wrote an excellent email to the European Commission berating their reliance on talking to the rating agencies earlier this year: