Robert Buddan, Contributor
WITH JAMAICA'S debt under international scrutiny, credit rating agencies (CRAs) have come to the centre of attention. CRAs have established themselves as gatekeepers of the international credit market. They now play a more important role than in the past. They establish standards for budgeting and hence, of governance, that is, how much governments should spend and earn. This sounds like good accounting. But it is difficult to hold credit agencies accountable. When they err they can do considerable damage to borrowers and investors like.
Standard and Poor's (S&P) has downgraded Jamaica's credit rating. S&P did admit that Jamaica suffered shocks from September 11, from a weak international economy and major floods. But the bottom line is the Government's credibility to repay debts. CRAs treat small, open, dependent economies like Jamaica, the same way they assess any other economy.
THE DEBT TRAP REVISITED
In one of the most famous studies of the 1970s, Cheryl Payer published The Debt Trap. It made four points. Debt is caused mainly by interest charges and governments are trapped by struggling to pay interest and never get to paying down the principal. The International Monetary Fund (IMF) and World Bank are unaccountable and managed by representatives of developed countries. They prescribe conditionalities that never work but only increase indebtedness. Yet, countries must follow IMF/World Bank schemes because without their approval of economic management, international credit agencies will give them low ratings. Since Payer's publication, the debt situation has become worse worldwide.
In 1998, Japan announced that it would turn the tables on credit rating agencies. It would begin rating the agencies themselves. Japanese companies had come to resent the agencies for downgrading them without consent or their participation. These agencies are private institutions with no special authority. They might even be motivated to produce inaccurate ratings because they are private companies that pursue profits. Their primary business is to earn commission by issuing ratings to investors. These ratings are based on financial statements not social stability, democracy or human rights. These cannot be measured for profits.
UNFAVOURABLE ASSESSMENTS
A Japanese article said some agencies have admitted to issuing unfavourable assessments so that companies will ask them to come back when the company's balances are more favourable. This means more commissions. Credit agencies win both ways. Borrowers want their opinion when they are credit worthy and lenders want their opinion when borrowers are unworthy.
Governments are even more susceptible to these credit agencies than corporations. The intrusive eyes of the IMF require government disclosure, if governments are to be given IMF favour. On Colin Powell's visit to Africa last year, he advised African countries to make themselves available to credit agency ratings. Some wondered why this advice came from the United States State Department and not from the Treasury Department. Credit agencies need the IMF and governments to pry open other government finances for private investor decisions.
Since 1998 CRAs have been put under more pressure, particularly in Asia. They are being asked to subscribe to international or regionally designated standards of best practices to earn credibility as CRAs. There was strong support among Asian CRAs for minimum regional accreditation standards.
In 2002, Business Week complained that for years the CRAs have operated like an exclusive club. The U.S. Congress was not happy with the three powerful agencies recognised to appraise American companies. They were giving Enron positive investment ratings up to four days before the company filed for bankruptcy; and then they began to dramatically downgrade companies at any sign of trouble leading to further business fall-outs. The U.S. Securities and Exchange Commission was forced to study the effectiveness of rating agencies, including Moody's and S&P.
Almost one-third of American executives surveyed in 2002 believed that companies with bad debt ratings were inaccurately rated; and two-fifths believed that it takes too long for changes in a company's finances to show up in the ratings. This latter is true for countries too. CRAs have come in for stinging criticism since the Enron meltdown. The role of CRAs has also come in for critical review after the Asian crisis. In the aftermath of this crisis, the rating agencies suffered a severe loss of credibility.
FINANCIAL LIBERALISATION
The liberalisation of financial markets has added a new dimension to the problem. Financial crises spill over across national boundaries with implications for credit relationships. Moreover, they lead to tight constraints on political action even as states seek to promote their financial sector through competitive deregulation.
CRAs become "private authorities" in the governance of financial markets. A study by Dieter Kerwer (2001) said that, "In spite of the severity of adverse effects of a downgrade, rating agencies will turn a deaf ear to borrowers' complaints about incorrect credit estimates, because negotiating with borrowers would risk tarnishing the rating agency's image of being a neutral information provider." It is hard to hold these agencies accountable. They never have to justify their actions. They need not compensate for the adverse effects of their mistakes.
CRAs have an ideological function. They justify financial markets as a neutral and efficient means of allocating resources even though their ratings favour the financial elite (investors) and disfavour redistribution (social spending).
This becomes more critical as CRAs rate more countries. Financial liberalisation has meant that vast sums of money move around a larger number of countries. This creates a speculator's market for gambling on exchange rates for profit. In fact, the story of financial markets is a story of financial crises.
FINANCIAL CREDIT AND DEMOCRATIC DEFICIT
When a country such as Jamaica has such a large national debt, one can expect that its credit ratings will not be good. But the practices of rating agencies make one curious. Moody's downgraded Jamaica's credit rating just before the Finance Minister presented his Budget rather than waiting to hear the presentation.
Furthermore, the rating was lower even after Jamaica reduced its budget deficit from 8.4 per cent in December to 7.7 per cent in March. It failed to consider PricewaterhouseCoopers' assessment that the tax and deficit targets set out in the Budget were credible.
LOW CREDIT RATINGS
Ultimately, rating agencies assess markets rather than countries. Put another way, they see countries as markets and rate them for profitability, not for democracy, social stability or poverty alleviation. Thus, countries that are among the highly indebted poor countries will get low credit ratings when they are precisely the countries that need investments the most.
Undemocratic countries can have high credit ratings whereas democratic ones can have low ratings. Countries with deficit spending to support social programmes might have lower ratings than countries that have balanced budgets but weak social protection. Countries that have suffered temporary shocks can be downgraded so that short-term financial problems become long-term ones.
Botswana is Africa's top-rated country according to CRAs. Yet, more than one third of its adult population has HIV/AIDS (the highest in the world) and a child born today can expect to live only 36 years.
In fact, whereas Jamaica and Botswana score the same on the democracy and governance index of the UNDP's Human Development Report (2002), Botswana scores much lower down (126 to 86) than Jamaica in human development. Financial balance can coexist with great social deficits.
CONFIDENCE
Remarkably, in 2002, Botswana scored one grade higher than Japan on investor ratings. Yet, Japan had the world's largest foreign exchange reserves, the world's largest savings and was the world's largest creditor.
But Botswana's budget was controlled by foreign diamond interests to protect their investments in mines. Botswana does not run a budget deficit but Japan does in order to invest in resuscitating its domestic economy.The ratings that CRAs give for sovereign debt are given front page but uncritical assessments in Jamaica. They are accepted as is. We should bear in mind that these agencies are not beyond self-interest, neo-liberal ideologies, the interests of global financiers, and they provide limited assessment of a country's credibility.
One local editorial suggested that Jamaica's downgrade was sign of a loss of confidence in the country's financial management. We should be careful not to blindly entrust our own confidence in CRAs when some other countries, corporations and scholars do not have the same confidence in them.
Probably, the main point is that governments must do their own campaigns among investors and win their confidence. They must go directly to the investors and say why, despite the ratings, Jamaica is still a good place to invest in. They can use some of S&P's own criteria: low inflation, economic growth, potential to widen the tax base, level of development and the absence of a default history.
Then, there are the liberal investment laws, stronger financial regulation, developed financial system and democratic continuity. It is up to us, not the rating agencies, to demonstrate our confidence in ourselves and why others should have confidence in us.
Robert Buddan lectures in the Department of Government, UWI, Mona: E-mail: buddan@uwimona.edu.jm
