The Fitch ratings agency announced overnight that:
Fitch Downgrades Mexico to 'BBB-'; Outlook Stable
For those unfamiliar with rating agency nomenclature this means that Mexico's debt is now just above what is called ‘junk' status.
This is profoundly unhelpful. At a time when Mexico, like almost every Latin American country, is facing the challenge of coronavirus and a pile of US dollar debt over which it has almost no control as to cost, it is facing a rating agency saying that the cost of its debt servicing must basically increase through no fault at all of its own.
This is argument that this can best be described as callous: Fitch is very clearly putting the interests of creditors above the lives of the people of Mexico.
It can also be described as profoundly unjust: developed country debtors will profit from the crisis at cost to a developing country.
It could be argued it represents a failed paradigm when governments are all that are now underpinning capitalism but are being downgraded in the interests of rentier capitalists, nonetheless.
But most it could just be called wrong. It is a symbol of all that is profoundly misguided, amoral and exploitative in the world of financial capitalism.
I suggest that the rating agencies be subject to enforced silence on government debt right now. That would be a small step in the right direction to writing the wrongs they have caused for so long.
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Debt write off for all the so called developing nations is the only solution. No way can these struggling economies ever afford the trilions owned and no way can they ever pay it back or even the interest. Look at the way the ECB treated Greece!
A good plea Bill, if only it could be made to work. What happens when the debts are written off. The vulture funds move in. Registered in Delaware under conditions of secrecy. They then buy up at cents on the dollar those very debts written off. Next they sue in a New York court before a sympathetic judge. The judge awards the full value, plus costs, plus interest. The judgement decrees that the amounts awarded by the court can be deducted from the transfer of any monies payable from the USA to the country in question. Just like PFI scams these deductions come at the expense of the public good and wealth-fare, in these cases of some of the poorest people in the world.
Laughable!
Anyhow, as Fitch and all the others told congress in I think 2009, their ratings are ‘just opinions’.
Let us remind the markets of that, shall we, hmmm? ‘Just opinions’, like many millions of others each day. So, in other words, they can be ignored.
Insofar as they don’t compel action they are indeed opinions. And investors are free to ignore them. Which makes Richard’s point regarding “enforced silence” rather chilling.
No – they are used to control the investment decisions of many organisations so your claim is utter nonsense
The thing is Matt, they were rating banks’ MBS products as solid investment grade right up to the fall of Lehmann Brothers (and after) and then hid behind the ‘only opinions’ defence when they got pulled up by Congress.
All the rating agencies do is feed the herd mentality of the financial sector and also help them to mislead investors such as pension funds, a number of which took investment banks to court over mis-selling after 2008.
But the real problem lies in politics – the unwillingness for Governments to bring these rating shops to heal and make them work objectively – ratings agencies are paid by the banks to rate their products. There is some sort of agency problem at work here. I’d like to see a more objective system at work. Why not give the role to the public sector?
I never quite understand how these agencies seemed to just walk away from 2008.
Duncan
See above. That’s how they did it. Watch ‘Inside Job’.
All of this is not surprising given a hidden war that’s been raging for a least half-century in much of the world between the real productive sector and the FIRE sector. The FIRE sector is truly Neoliberalism’s offspring with the ratings agencies its attack dogs:-
https://www.nakedcapitalism.com/2020/04/the-use-and-abuse-of-mmt.html
While this will impact the price of debt in secondary markets the cost to Mexico of servicing their existing debt won’t change with this downgrade: The coupon hasn’t changed.
Stop being stupid: Mexico will have to issue more debt
Of course it will impact the price
His point was, I think, that existing debt was issued at a coupon of x% which Mexico will continue to pay. Any new debt issued will reflect a new coupon which may well be higher.
So it costs Mexico…
Didn’t Fitch’s mother tell them that if they can’t say something nice about a debtor, they shouldn’t say anything at all?
🙂
“Didn’t Fitch’s mother tell them that if they can’t say something nice about a debtor, they shouldn’t say anything at all?”
She did but she clearly didn’t give them much pocket money either!
‘developed country debtors will profit from the crisis at cost to a developing country’
Can you explain this please ?.
The owners of debt gain
Developing countries pay
I could have been clearer….
I’m sure you couldn’t have been clearer, but you are wrong. If Mexico is downgraded owners of debt lose because their bonds are valued lower. As you say it couldn’t be clearer?
But the future transfers rise
That was my point
What we also need is to stop newspapers publishing negative stories on government debt, and maybe lock up journalists who defy that ban. Free speech be damned.
It is 10 years since I was a trustee of a pension scheme and I don’t have the current rule book to hand. However, my memory is that we trustees were under a fiducial duty to defer to the “opinions” of rating agencies.
I am sure you were
And that is what has to change
They can be wrong
Michael
Please DO read what was written will you?
Before the financial crash, the ratings agencies ratings were seen as pretty reliable and industry standard (despite how many crashes BTW, brought about by poor accounting standards and/or clear criminality at work).
As of the 2008, when trading and selling using ratings was in full swing in the MBS sector even right up to the first banking collapse, it was only when the ratings agencies were brought in to testify did they rate their own ratings as ‘opinions’ – in other words, not to be taken too seriously.
Fitch, Standard & Poor and Moody’s all reeled out the same lame explanation.
You can watch them in the documentary ‘Inside Job’ on original footage.
As far as I am concerned the ratings agencies made themselves redundant right there.
Who should do it? Well, given that this is yet another example of why markets are shite at protecting consumers and investors, the State should do it, and in Britain rating these investments could be done by a new section of the FCA say?
One of the issues with ratings is the sheer volume of assets to be rated.
Therefore if rating was made more scientific and fact based (with more certainty underpinned by a better accountancy standards than we do now, but also more considered appraisals of those involved) then the ratings process would deliberately slow down the introduction of new products/weapons of financial mass destruction to the market, disarming those out to make a quick buck at someone else’s expense.
Just an idea.
Hmmm. Not sure silencing the Rating Agencies is a great idea. I think you need pretty powerful arguments to justify gagging people and I don’t think your case clears that (very high) hurdle.
Almost, ratings changes lag market prices significantly so I am not sure that this news will alter the price of Mexican debt – indeed, a glance at Mexican Credit default Swaps shows little change in the last day or so.
Also, one could argue that Fitch has shied away from more damaging action. The key “barrier” is between Investment Grade and non-Investment Grade and BBB- is still investment grade. If they had gone to BB+ then there would have been forced sellers from certain funds and this is now avoided.
Where I do agree with you is that borrowing IS an ongoing process (not just a one-off price change in their secondary market debt) because debt always needs refinancing. As an accountant you will have a view but I find it slightly absurd that during the Great Financial Crash falling prices in Bank debt was recorded as a profit by the issuing bank.
What is needed is an international framework where sovereign debt markets can be supported in the way that the Fed has supported its own corporate bond market. Maybe new SDRs helps? I am not sure…… but we will probably not find out now that the US has said “no”.
I agree, they did not go for junk
But their whole logic is wrong
I think the embedded power of their rankings in many investment structures has to be removed
They can say what they like: but they have this embedded power, and that is dangerous
Completely agree that the Rating Agencies have too much power but what to do?
(1) Ban anyone publishing a credit opinion? No, not realistic…. or desirable
(2) Censor opinions before publication? “qui custodiet ipsos custodes”
(3) Abolish Credit Ratings from official use (ie. Bank Capital Requirements are ratings dependent). Yes, this is quite doable but there must still be some way of differentiating the riskiness of banking assets. Regulators thought long and hard about this and were very nervous about enshrining the opinions of Moody’s/S+P into regulations…… but in the end could find no better alternative. If you have ideas here then a lot of people would be eager to listen.
(4) Hope that all investors do their own credit analysis and that Moody’s/S+P’s business wither away. Dream on, it amazes me how little credit analysis investors in credit actually do!
Whether Mexico or anyone else; now or at any other time….. just when a borrower needs a break the cost of credit goes up in their face. ‘Twas ever thus.
I am only discussing sovereign ratings…..
3 would do just fine
4 would be possible
The absence research generally is staggering
The idea is not to gag, but to use the ratings agencies own logic against them – ensure that investors know that these are ‘just opinions’ and make sure the regulations insist on a health warning being issued with them.
This might at least encourage investors to do their own research. Having said that, Richard does not keep emphasising the need for reform of accounting standards for nothing as this is a big part of the misleading that goes on.
I still think that ratings agencies should be nationalised and the whole sector needs to be slowed right down. It moves too fast and causes too much damage.
Amazing how much ignorance there can be about the role of Rating agencies and how their opinions are used in one thread!
In a more uncertain world the ability of the Mexican government to repay it’s debt has clearly reduced, but somehow it is wrong to share that opinion for investors to do with as they wish!!
Priceless.
Not at all
Some of us remember the systemic abuse of these agencies
And I use the word advisedly
Just remember how they contributed to 2008
We don’t want to go there again