Walt Secord, Labor’s Treasury spokesman in NSW, and Michael O’Brien, Liberal Opposition Leader in Victoria, should be condemned for their attempts to score cheap political points when Standard & Poor’s downgraded its AAA credit ratings of both state governments last week. Fortunately, the politicians’ unprincipled carping fell flat.
Both men wanted to have their cake and eat it. Neither was prepared to criticise their government’s big spending to alleviate the state’s pandemic-driven high unemployment – nor admit that, had their party been in power, it would have done the same – but both wanted to portray the consequent downgrade as proof positive of their political opponents’ financial incompetence.
But the deeper truth is that the financial markets and economists have stopped caring about the august pronouncements of the three big American ratings agencies.
Their decline has three causes. First was their loss of credibility following their role in the global financial crisis of 2008. Not only did these supposed paragons of financial precaution fail to foresee the looming collapse, but they actually contributed to it by selling triple-A ratings to the promoters of private-sector securities subsequently discovered to be “toxic debt”.
Just as the scandal surrounding the collapse of Enron in 2001 led to the demise of its auditor, Arthur Andersen, formerly the big public accounting firm with its nose highest in the air, so the financial crisis showed the world that when one for-profit business is paid to report on the affairs of another for-profit business, only an innocent would expect the audit or prospectus report or modelling exercise or credit rating to be genuinely independent.
The second development contributing to the decline of the ratings agencies is the emergence of what the Americans call "secular stagnation" and others call being caught in a "low-growth trap" – where aggregate demand can’t keep up with aggregate supply, and the supply of "loanable funds" exceeds the demand for borrowed funds.
Two side effects of this long-term structural shift of particular relevance to the credit-rating industry are the fall of inflation rates to negligible levels, and the fall of the global real "neutral" official interest rate to a level somewhere near zero.
Especially with the rich world’s central banks – these days, including our Reserve Bank – so heavily into "quantitative easing" (that is, buying government bonds so as to force down their interest-rate "yields"), all this means super-low interest rates, increased private investor demand for government bonds (because there's so little else to invest in), and central banks doing all they can to stop the interest rates on government bonds (including state government bonds) from being driven up by investors.
Third, it’s hard to see how a national government with a floating currency, which borrows only in that currency, could ever default on its debt. (Nor is it easy to see our federal government standing by while one of our state governments defaults on its debt.)
Now do you see why – at least as applies to government securities – events have overtaken the ratings agencies? They’re doing a job that no longer needs to be done, and making assessments of the supposed risk of default on state government bonds that won’t be defaulted on.
This is why our top econocrats have stopped caring about the actions of the rating agencies.
Reserve Bank deputy governor Dr Guy Debelle said recently: "There is the possibility of a ratings downgrade from higher debt, but that really only has a political dimension not a financial dimension, as government bond rates would likely be little changed.
"In any case, a ratings agency should not be the determinant of [budgetary] policy. Fiscal policy should be set to be the most beneficial for the Australian economy and people."
Treasury Secretary Dr Steven Kennedy said recently: "I don’t think there is any significant implications for Australia from a ratings agency downgrade. It is an important tick of confidence to have the rating agencies’ assessment … but frankly the actual impact on the economy I think would be negligible."
Reserve Bank governor Dr Philip Lowe said in August: "I think preserving the credit ratings is not particularly important; what’s important is that we use the public balance sheet in a time of crisis to create jobs for people."
And more recently: "A downgrade of credit ratings doesn’t concern me. The AAA credit rating had more political symbolism than economic importance."
Just so. Although the ratings agencies have lost their economic credibility and usefulness, state governments remained fearful of the fuss their political opponents would make over a downgrade. But their opponents’ failure to gain traction last week spells the beginning of the end for the agencies’ unhealthy influence over government spending and borrowing.
