Posts tagged ‘S&P’
We saw recently how the ECB’s new bond-buying programme helped draw a line under the recovery in market sentiment. It feels as though a number of people are now less afraid of Europe than they were a few months ago.
Among those people, so it would seem, are the ratings companies. Last week we saw S&P downgrade Spain to a notch above junk – not good news, exactly, but a relatively moderate move (from BBB+ to BBB-). And then on Tuesday, Moody’s – who already had the country rated at the BBB- level, and “on watch” for future downgrades to boot – resisted the opportunity to put some distance between themselves and the competition by leaving their rating at investment grade. They specifically cited the possibility of further emergency lending together with bond market intervention by the ECB as reasons for their decision.
How times change. In July of 2011, Moody’s junked Portugal because of the intervention in debt markets being hinted at – but not by then even formally discussed – as part of the renegotiation of the Greek bailout. The following week they junked Ireland because they thought further emergency lending might be required to see it through its difficulties. Not to be left out, S&P waited until August then took some elegantly left-field action by notching the US down from AAA.
Back in 2011 the ratings companies were worried about falling behind the market and risking the same charges of over-optimism, incompetence or even negligence which they had faced as a big part of the credit market boom prior to the collapse of 2007-8. So what has changed?
The European downgrades last year were not well received. S&P’s and Moody’s offices in Milan were raided by police as Italy feared its ratings would be next. The EU began to take an interest in regulating the companies and there were appeals to take antitrust action against a perceived oligopoly. And action was taken by the ECB, ISDA and others to reduce the mechanistic reliance on credit ratings for the acceptance of loan collateral or the triggering of credit derivatives.
But more important than any of this must be the change in sentiment which recent months have seen. Last year’s downgrades really were chasing the market. Portugal’s five year bond yield began 2011 at 5.7%. By the time Moody’s slashed the rating in July this had more than doubled. This year things have taken a very different turn. When Moody’s cut Spain’s rating in mid-June its five year yield had jumped up past 6%; now it’s back to 4.2%.
None of this is to say that ratings are irrelevant – or that they were then. Portuguese paper suffered sharp falls when Moody’s pulled the plug, and Spanish bonds have found renewed support since they decided to hold fire. But what we surely can say is that these ratings decisions are a further sign that sentiment over the European crisis is bottoming out.
In the months ahead there is plenty of room for more scares. Ratings companies, governments, markets – the game goes on, and can always change. Still: it is encouraging to see that Moody’s, too, has drawn the line this week.
The UK economy is hardly unique in that it currently faces difficulties. Nor is it unique in enjoying “safe haven” status. While this status is not guaranteed, it is to be hoped that it will last until confidence returns. Unfortunately, this week’s release of government borrowing data for July has drawn increased attention to the country’s weak debt position – something with which readers of this blog will be familiar, but which has tended to be ignored or dismissed by most observers who have chosen to believe that the UK is undergoing an “austere” level of fiscal consolidation.
In the words of the report issued by the Office for Budget Responsibility:
Excluding the impact of moving the Royal Mail’s historic pension fund deficit and associated assets into the public sector, the March Economic and fiscal outlook (EFO) forecast a £5.1 billion improvement in PSNB in 2012-13 compared to 2011-12. But after the first four months of the financial year, PSNB (excluding Royal Mail) is £9.3 billion higher than last year.
The figures at the back of the OBR report show that this increase puts UK borrowing 26% over where it was for April-July last year, and that borrowing now needs to fall by 16% for the government to hit its (undemanding) target for reducing the 2012-13 budget deficit to £119.9bn from £125bn the previous year.
Still, we must not be too gloomy. As the OBR notes, monthly data on fiscal receipts and outlays are volatile and subject to revision. And only a month ago, S&P affirmed the UK’s AAA credit rating and stable outlook, while observing that they thought the OBR’s estimates for growth and government debt over the short term were too optimistic. (Their full report can be summarised as: “despite its weak growth and large debt burden, Britain isn’t in the euro and that’s good enough for us.”)
Like all governments, our own has made mistakes. The use of indirect taxes to help bolster receipts ramped up inflation, which squeezed wage growth and pushed the household sector into recession. And just as this effect has begun to recede, our strengthening currency has seen real exports fall for two consecutive quarters (sterling has risen some 11% against the euro over the last twelve months). But if there are no shocks, the economy should manage to muddle through the current period of stagnation. Growth should return, employment continue to grow – and debt reduction targets will have a much better chance of being hit.
All the recent borrowing numbers really do, then, is remind us that the UK has never been a safe haven from the sovereign crisis on the basis of its own debt fundamentals. If anyone begins to think that this matters – one of S&P’s competitor “agencies”, for instance – it could still spell trouble. Otherwise, Britain ought to get away with it.