After the S&P Downgrade: It’s Anybody’s World

S&P’s August 5, 2011, decision will enter the history books as an event as momentous as when the tired old European nations stepped back from the colonial brink in 1960 and let loose their former charges in Africa, Asia and elsewhere to chart their own destinies.

S&P’s decision is also to be heralded because it overcomes the severe home bias which the rating agencies had until now sported. They were always good at finding weaknesses galore with plenty of other countries on all sorts of issues, while waving a special wand of magical dispensation over the fiscal vices encountered on the home front.

In foreshadowing his company’s decision, S&P president Deven Sharma made it plain in his late July 2011 congressional testimony that all actors in today’s global markets need to be measured by the same yardstick — not a flexible one for the United States and an unbending one for everyone else.

In arriving at this pivotal decision, let’s also give proper credit to the magic of U.S. immigration. Mr. Sharma originally hails from India and immigrated to the United States for his graduate studies at the University of Wisconsin. He evidently brought his Indian math and analytical skills to bear on the crucial subject matter of U.S. public finance (as well as on the far more complex matter, Washington’s budgetary kabuki theater, in itself a closely related sub-discipline of mathematical chaos theory).

The vengeful and hateful way in which members of the U.S. Congress behave toward each other did not leave the agency any other choice. American politicians, there is no denying, are mercilessly at each other’s throats — and specialize in blaming one another ferociously instead of dealing even-handedly with the real issues at hand.

S&P’s decision also reflects the new realities in global capital markets. As Tharman Shanmugaratnam, Singapore’s finance minister and now also its deputy prime minister, had made clear in a conversation in April 2011, it is now the (Eastern) creditors — and no longer (Western) debtor nations — that will increasingly set the rules of the game.

Standard & Poor’s seems to have grasped that new reality in full. In the past, ratings often were little more than “designer items,” paid for by the debt issuer in order to convince the debt market of the virtues of one’s own issues. In other words, they were not to be trusted.

However, the recent financial crisis had a salutary effect on the rating agencies. It became clear to them that colluding with debt issuers to shape their toxic wares no longer represented a viable business model. The ratings had become unbelievable works of fiction, not objective, data-based analyses.

In this brave new world, where no particular nation or culture is in charge or dominant anymore, the premium is no longer on the seller/issuer and its ability to sell the new debt issue. Instead, it is back to the original intent of ratings — providing the potential buyer with an analysis of the credit risk s/he assumes in purchasing that debt. In other words, the rating agencies are, thankfully and painfully, back to their original mission — which is to serve buyers, not sellers.