- Your history
"Dear Mr(s) Credit Rator"
We in Europe - the old continent - have taken notice since late Friday that our credibility as a debtor has been put into question. We were warned earlier that something was waiting to happen. Now that it has materialized, I nevertheless have some questions running through my mind lately, based upon the following fundamentals and credit scores :
The thing is I don't understand. But being a humble economist, I am always willing to learn. You see, in your latest evaluation of countries like Hungary and Estonia, you have been questioning the credit rating and countries' qualities based upon leverage. And more specifically private sector leverage. So I don't really understand the ranking and rating of these countries. And when you look at the above table - based upon Worldbank and OECD stats using the same methodology - I am a little bit confused as well for other countries (Spain, Italy, Portugal, E-Europe mentioned), coincidentally relative to English speaking countries. Now your methodology probably uses other criteria but then again, I get confused. If it's about a corruption index, open economy index and market openness, public leverage, I have some difficulties in understanding the data shown above linked to the credit ratings and relative rankings of different countries.
Now if it's an arbitrary exercise - and based upon the scarce info available to this humble economist it seems so but you can always enlighten me - that would be OK. As long as you admit it, then we can make an end to this misplaced prank and stop paying you fees for repeating this exercise. If not, I am open to any rational explanations. I will even help you on these, just nod if it makes any sense
1) We change our language on the entire continent into English. Dialects are admissible, as long as it doesn't sound paddy Irish.
2) If 1 is a required but not a sufficient condition, we have the printing presses warming up. To this extent, you have to give Mario Draghi a break on credit ratings because he has not been that long in office, should still learn a bit (Goldman, quick process) and he has already been trying hard. I believe we deserve the benefit of the doubt here.
3) If it is something else, we would also like to be informed, really whatever, but please let us know !
In the mean time, I am anxiously awaiting your reply and remain
Yours Sincerely
An anonymous economist
20 Comments
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Finance Addict
On 16 Jan, 2012
The rating agency may be annoying, but is not the most important constituent. The most important people to keep happy are the ECB and there are distinct signs that they are most unhappy:
http://bit.ly/xbGYzj -
christof Govaerts
On 16 Jan, 2012
@finance addict
It's no secret that a couple of people are unhappy in Frankfurt. But unfortunately, they are a minority. As for bond buying : 213 bio is still peanuts compared to what the FED has achieved upon til now, or the Bank of England (200 bio£). They have solved that matter in an elegant fashion by giving banks unlimited long term funding (36 months) ; so what the ECB by law is unable to do will be materialized by banks courtesy of Frankfurt bank funding. And of course that's QE, I know, but apparently that's the only way these days to obtain grace from or rating bureaus -
spaardertje
On 16 Jan, 2012
A new example of Euro misinformation published by Marketwatch on 01/09/2012: the columnist, David Marsh, tries to give credit to the idea that the spring 2012 French presidential election will be more bad news for the Euro by explicitly stating that François Hollande is an Eurosceptic. As everyone knows in France, François Hollande is, on the contrary, a pro-European and fiercely pro-Euro which leaves only two options relating to MarketWatch/Marsh: either they don’t know what they are talking about, or they are deliberately lying. In both cases, that throws some light on the value of the opinions of the major US financial press on the Euro and its future.
Source: GlobalEurope Anticipation Bulletin Nr 61 - January 16, 2012
Misinformation: a well-paid profession?
Wikileaks informants: traitors who are to be prosecuted and locked up?-
christof Govaerts
On 16 Jan, 2012
@All
And if you include financial sector leverage, the situation for the UK becomes completely absurd in terms of AAA
http://www.businessinsider.com/how-long-until-people-start-freaking-out-about-great-britain-2012-1-
(n)iemand
On 16 Jan, 2012
Tjaaah... niemand twijfelt aan bereidheid Bank of England de pers aan te zetten... terugbetalingscapaciteit te over, maar niet bij constante muntwaarde.
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Christof
On 16 Jan, 2012
Nog straffer, pond is de laatste tijd zelfs aan het versterken: UK gilts zijn nu zzoals treasuries de extreme flight to quality, minder dan 2 percent op 10 jaar met 5 percent inflatie. Who or which fruitcake apart from the bank of england is buying this stuff ?
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christof Govaerts
On 16 Jan, 2012
@spaardertje
"either they don’t know what they are talking about, or they are deliberately lying". Or a third possibility : if you are in a pileload of sh!?t yourself, it always comes in handy to focus on some elses problems. And unfortunately, anglo-saxon press coverage in the financial world is a very powerful medium. -
Philippe
On 16 Jan, 2012
That, Christof, is exactly what they are doing. Hiding thelselves behind something purposedly made obvious. Diversion. .The strategy is old as organized power. But sometimes it's a third party that takes advantage of the situation to pursue its own objectives.
100 years ago the Russian Empire was in bad shape. They diverted public attention on the situation of slavic minorities in the vulnerable Austro-Hungarian Empire.
Russia helped the creation of the Balkan League, seing it as an instrument for a future invasion of Austria. Serbia was eager to be leader of this league, as they saw Bosnia as historical heritage.
Bulgaria wanted Thrace Greece wanted Constantinople. The 1st move of the league was to attack the Ottoman Empire in Oct. 1912.
Austria strengthened its links with Germany. Germany launched a war plan in Dec 12, aiming at putting the war machine on full combat readiness by 1 July 14.
On 1st June 14, Tsar Nicholas, on state visit in Romania, declared that Archduke Franz Ferdinand was a danger. He was in favour of the emancipation of slavic citizens, making Austria a "triple crown state".
On 28 June 1914, 6 serb activists, guided by rogue elements of the Serbian intelligence ( The black hand) organized the assassination in Sarajevo. The role of Russia has been questionned.
The rest is history. Germany then seizes the chance of a war it had been preparing for almost 20 years.-
Christof
On 16 Jan, 2012
Hello philippe,
Like my other faithfull audience, I very much appreciate it when eduacted people with historical background inform me on things I don't know. There was a dutch writer whose name escapes me right now who invented the term metabletica : basically, nothing in history occurs just like that and it is an ongoing repetition (it's all interconnected). And this time, it's not different and I become a litle bit scared if the 30ies would repeat themselves. A lot has already passed the review.-
gofish
On 17 Jan, 2012
Alles herhaalt zich niet, alles evolueert. Spijtig want ik zou zo graag mijn achterstallige huurders 100 zweepslagen geven....
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Theo
On 17 Jan, 2012
@Philippe
One clarification:
Greece didn't enter the Balkan League wanting Constantinople. It wanted to resolve the issue of Crete in its favor. Bulgaria wanted Constantinople, as it had always been part of Thrace. The historical name of Constantinople is Tsarigrad, or the city of the emperors. Constantine himself was a Thracian from what was then Moesia. He was born in Naissos, the mythical birthplace of Dionysus.
Bulgaria didn't want Greece in the alliance because it didn't trust it. After the old Greek king was assassinated his son signed up with the allies.
The Balkan League was formed because the British Empire didn't like the Treaty of San Stefano... and in came the Treaty of Berlin.
The direct cause of WWI was the annexation of Bosnia and Herzegovina by Austria-Hungary in 1908.
So yes, the Anglo-Saxons have always known how to exploit the dynamics on the Continent to their advantage. It's not that difficult - just supply them with the opportunity and the means to kill each other.
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Joeri Spitaels
On 19 Jan, 2012
Christof, thanks for publishing these interesting figures, but let's turn the question around: How would you rate a country's credit worthiness yourself? Surely you would take into account more than the 3 parameters in the table above. What matters is the pay back capacity, which I can imagine, is probably linked to the present level of taxation and the political leeway for raising them further, and to the disparity in indebtedness. In Hungary for instance, the amount of private debt held in foreign currencies is still fair in absolute figures, but I hear some debtors are on their knees. That makes it pretty hard to raise more taxes I would say. (Note that I am not affiliated anyhow to rating agencies, banks, or the public sector.)
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christof Govaerts
On 19 Jan, 2012
@Joeri
How do you define pay back capacity ? And if its the level of taxation as a % of GDP, I agree the US has some spare capacity, that is, if corporates and rich individuals don't find loopholes. When looking at the current US debate for example, I have to laugh with Romney and Genrich doing all the best they can to hide the fact that they don't pay any taxes at all. And taxes has always been a tough one in the US . But with their current budgetary stance and future liabilities, they can't escape the debate, whether left or right. As for E-Europena countries and debt in foreign hands : have you seen the number for the US ?? I have just blogged on this issue (Middle East Nimby)
As for my personal credit rating : I would take the same indicators into consideration, may be add some things like politics and market penetration/liquidity/foreign dependence but then again, US/UK don't fit the current picture of rating : it's biased, end of story
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Theo
On 19 Jan, 2012
The problem with these sovereign credit rating variables is that they are all bench marked against GDP.
When GDP is inflated by all sorts of artificial means for years, there comes a time when that is no longer possible and then the problem of the cost of this GDP (debt) pops up.
Yes, previously Belgium was able to "lower" its debt/GDP ratio, but only because it was able to "raise" its GDP due to massive national currency devaluation.
When it joined the euro, it was further able to keep a low debt/GDP ratio while increasing borrowing through massive increase in prices of everything. Volume never goes up, only value! It's like Inbev!
Now we are at the point where GDP cannot be further increased by artificial means because doing so will cost even more than tightening the belt. It is stupid that it took politicians this long to finally admit that fact.
Yes, austerity will cause reduction in GDP, because economic growth is on the tax infuse and not dependent on private investment or savings.
What is needed to increase GDP while the austerity is on, is to make systemic changes in order to free private economic activity and give the economy the impetus it has lacked and create the dynamics of entrepreneurship. This is how I understand the guidelines from S&P's. Fighting this for ideological reasons is useless - the last 20 years have shown the results.-
christof Govaerts
On 20 Jan, 2012
@Theo
If I understand correctly, we are in need of some kind of industrial revolution, improving the supply side of the economy (sounds a bit Schumpeter, I know) ; but what kind of revolution will give us sufficient escape velocity oit of the vicious circle ; and as far as the long wave theory of Schumpeter concerns, this kind of creative destruction has usually a very painful interludium of a couple of years. Basically, it will get worse before it gets better. The point I would like to make is that the social environment won't tolerate this and thenyou really come into very uncertain waters and possible storms. The system might change for better or worse, the thirties we certainly don't want to relive.
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Theo
On 22 Jan, 2012
@ Christof
1. What is better: couple of painful years or by now 5 years of trying to muddle through it by doing nothing. How European!
2. Creative Destruction is one way to go about it. The problem with it is that one side reads Schumpeter, while the other reads Marx on the subject.
Just read Nietzsche! When I wrote that I finally got "Death in Venice" and Mahler this is what I meant - I understood the link (Dionysus) between the music of Mahler and Nietzsche. This is where the concept of Creative Destruction comes from. Germans were the first "Orientalists" of the Continent. Capitalism comes from the philosophies of the East. Socialism comes from the religions of the West.
Like I wrote before - German Socialists were the first in Western Europe to reject the hitherto dominant interpretation of Marx. The founders of the LSE must have turned in their graves!
If you want to avoid a repeat of the 1930's you need to educate the people on current socio-economic realities - which will never happen of course. It is so much better to keep them ignorant of how things really are (Nietzsche again - Being vs. Becoming). When a people is divided by its political leaders that country will never be able to fight its own socio-economic demise.
Trade Unions cannot reasonably explain why they are organising strikes. Try the election of the interim PES leader... those decision where taken at the same time in Brussels.
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Mary
On 1 Feb, 2012
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Theo
On 22 Jan, 2012
To go back to the topic of how best to assess sovereign credit ratings... How about by using Net Wealth as a measure?
The difference between foreign assets and foreign liabilities after consolidation of all domestic debt.
What is the financial deepening of all EZ countries?
I know, nobody reads "The Wealth of Nations" anymore... it is so unbiased!
http://www.mckinsey.com/Insights/MGI/Research/Financial_Markets/Uneven_progress_on_the_path_to_growth-
christof Govaerts
On 23 Jan, 2012
@Theo
I am glad you refer to the link of McKinsey because there it's blatantly clear that the UK is in the worst possible corner concerning total leverage-
Theo
On 24 Jan, 2012
@Christof
I didn't know that fact was being contested...
The point is who owns the debt!
Capital I invest in my own company or any other company is debt owned to me in both cases.
Both debts are owned to me, but the assets are booked separate
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