independent

Thursday 17 April 2014

Mark Keenan: How Ireland can cash in on Moody's blues

As our reputation enhances internationally, the ratings agencies, one of whom recently voiced ambiguous opinions about us, are themselves coming under scrutiny. By Mark Keenan

LAST week two senior Irish economic figures publicly vented off at international ratings agencies.

Michael Noonan accused Fitch of a "pretty ambiguous kind of assessment" on its view that Ireland's property market could probably fall by another 20pc.

Then NTMA boss John Corrigan sniped at Moody's BA1 "junk" rating which he said cost the country 300 basis points more than Germany in raising money on the debt markets, asserting that Ireland had not received the credit it deserved from the ratings agencies for putting its house in order.

Indeed Fitch's "property" rating did seem uncharacteristically shaky and infused with doubt – the statement was ambiguous and admitted that it could be wrong.

And many in the international markets will find it strange that Moody's rates Ireland's prospects alongside those of Guatemala, a country with the fourth highest rate of malnutrition in the world where the government battles drug cartels for control – or alongside those of the Philippines where a third of families live below the poverty line.

Two years ago, the mighty troika of Fitch, Moody's and Standard and Poor's seemed invincible. They were described by the BBC's Robert Preston in 2010 as the "Gods of the credit markets,"and the following year, the London based 'Independent' newspaper named David Beers, the then head of sovereign credit ratings at S&P, the "most powerful man in the world that you've never heard of."

Britain and France were busy ratcheting up austerity programmes to maintain coveted AAA status, while Ireland had already discovered that downgrades can tip a country into a self-perpetuating spiral of grief.

At the onset of our own problems, downgrades led to increases in our interest payments which in turn affected our ability to pay and in turn brought further downgrades.

That we had big problems was certainly without doubt, but economists criticised the ability of the ratings agencies themselves – by virtue of their sheer clout – to tip the scales further into the red.

But as we enter 2013 the "Gods" of the markets are on the back foot. Scrutiny of the agencies has increased significantly from both sovereign states and the markets themselves after an activity splurge over 12 months saw them remove France's AAA rating, put Britain on "negative" outlook, while Germany and the Netherlands were among 15 countries which had their AAAs put on 'alert' as we entered 2012 (S&P).

Downgrade

The USA had already been downgraded from AAA. Most viewed the majority of the decisions as unjustified.

They caused many in the EU to become actively suspicious of the agencies with some even going so far as raising the question of an agenda.

"I am no fan of conspiracy theories but sometimes it is hard to dismiss the impression that some American ratings agencies and fund managers are working against the eurozone," fumed Rainer Bruederle, a former German economic minister a year ago when S&P threatened to downgrade 15 EU countries.

But like the USA, France pointedly shrugged off its downgrade with finance minister Moscovici saying: "This rating change doesn't call into question either our economic fundamentals or the reforms engaged in by the government nor the high standard of our credit."

The market went with Moscovici. In November, rates on ten year French debt fell from 2.07pc to 1.98pc. Before this, US interest rates had fallen from 2.56pc in August 2011 just before the US was downgraded, to 1.38pc by July last year.

Moody's own biggest investor, Warren Buffett reacted to the preceding US downgrade by quipping that the country should have a "quadruple A" rating. For its part the EU has reacted and is working on legislation to restrict agencies to three unsolicited sessions of ratings statements on sovereign debt per annum.

Christine Lagarde of the IMF has even called for a complete ban on ratings for countries currently in a bailout programme.

It all adds to the lingering stink from the 2008 crash – part blamed on the three agencies because of their consistent high rating of poisoned mortgage related securities. And Enron, Lehman and AIG all carried "safe" ratings days before they collapsed.

Throughout 2012, market watchers accused the ratings agencies' of being behind the market – with a definite "lag" factor in place regarding their research and subsequent ratings.

"Policy makers should be more preoccupied with the market than with the ratings companies, because that's where the real costs bear out," Brett Wander of Charles Schwab Investment Management told Bloomberg last month. His company oversees about $200bn.

"We have to wonder what's going on when these ratings agencies, which are supposed to be guiding the markets, actually seem to be following them instead," adds the ESRI's senior economist John FitzGerald.

Then last month saw an explosive Bloomberg report demonstrate the true extent to which the market has lost trust: that through the last 12 months investors ignored 56pc of Moody's ratings on sovereign debt and 50pc of S&Ps – relegating the former's advice to that of a reverse barometer and the latter's wisdom to the status of a coin toss. Junk status advice for sure.

But despite the waning of their powers through 2012, Ireland still has much to fear when it comes to ratings agencies – primarily because a large rump of global institutional funds, will still insist (by their own rules) on a clean bill of health from one or more of the big three before investing.

Recommendations

Those smaller funds who have invested against the agencies' recommendations are still less likely to ignore their advice when it comes to Ireland. This is simply because in-house they don't know as much about Ireland as they do about larger countries.

John FitzGerald, economist with the ESRI explains: "In 1993 when most Irish debt was held by four German banks, each bank had just one man assigned to watch Ireland.

"Sometimes two of those guys were on holidays at the same time.

"Today investment funds with smaller resources are more likely to have whole in-house teams charged with researching countries like France and Britain.

"But because Ireland is a small country, they are similarly less likely to have dedicated experts to cover it and therefore they are more likely to rely on the ratings agencies for an Irish view."

But the recent drubbing of Moody's, S&P and Fitch also means it's a particularly good time for Mssrs Noonan and Corrigan to engage in some very public prodding of their credentials regarding Ireland – particularly at a time when the agencies' own credibility is most at stake.

Mr FitzGerald adds: "What Mr Noonan and Mr Corrigan are saying here is, 'you guys might want to visit Ireland again to reassess us sooner rather than later – you might want to come again in March rather than May'.

"And there's certainly no harm at all in rubbing their noses in it right now. It's a long game that we're playing and this is all part of it."

Such an "early" positive revision could save the country tens of millions – by significantly raising the spend on Irish bonds sooner and by lowering interest rates earlier – an outcome that would certainly be rated triple A by the Irish taxpayer.

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