Standard & Poor Stands Up to Pressure from USA

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Standard & Poor Stands Up to Pressure from USA


S&P’s downgrade of USA triggers waves

After S&P downgraded the rating of USA, all eyes are focused on the rating agencies like the Moody’s and Standard & Poor. In India, Crisil, ICRA and other rating agencies are busy in assessing different companies, banks, insurance companies and financial institutions. Investors also attach great importance to the credit rating of these institutions. In fact the government of India cringed and begged before the rating agency Moody’s for reversing its downgrade of State Bank of India, India’s biggest bank.

Threat to European banks still remains

Standard & Poor has stated that the threat to European banks stays even after ECB funds. ECB has recently released half a trillion Euros into the European financial system. According to S&P, the move may give the European banks some time to recover but will not prevent downgrading of the banks by itself. This is a correct stand taken by S&P. When the base of a building is weak, it may collapse at any time. Whitewashing or painting the building will not prevent the collapse. S&P has already put the entire Euro Zone and big European banks like BNP Paribas, Deutsche Bank, UniCredit and Societe Generale among others on a warning note. Scott Bugie is the Managing Director of S&P’s Financial Institutions Division. However, S&P stated that the injection of funds by the ECB was a positive move to defuse the crisis. European banks’ problem is carrying too much debt.

Germany and France issued warning

In another report, S&P has stated that non-performing assets (NPAs) and credit provisioning are likely to increase in banking systems exposed to large inflationary pressure like India, China, Hong Kong and Vietnam. S&P has placed 15 Euro Zone nations on rating downgrade watch. This kind of mass downgrade of nations is unprecedented in the financial history. The warning covers two of the biggest economies in the Euro Zone namely Germany and France. Earlier, S&P also cut USA from AAA to AA+. On the other hand, S&P has upgraded Chinese banks. But in my opinion, though Chinese banks do not face any perceptible crisis now, they may also collapse if a small spark ignites a major crisis in China. Chinese society is built on authoritarianism. In the light of Arab Spring that has claimed many dictatorships as its victims, China may well face such a movement which will trouble its polity and economy. S&P and other rating agencies should not see only economics and statistics while granting their upgrades or downgrades. They should also look at the political situation for their assessments.

HDFC’s financial position is better than that of Indian government

S&P has assigned stable tag to Indian banks. This is a correct decision but here again one should not forget what happened to Indian Bank under the leadership of Gopalakrishnan. Indian Bank’s entire net worth was eroded due to NPAs. The government of India had to pump in fresh capital to bail out Indian Bank. S&P has assessed that the credit profile of some of Indian banks like ICICI Bank, SBI and HDFC Bank is better than that of India government itself. This is hundred per cent true. The same is true in USA also. The financial position of some of the companies like Apple is far better than the financial position of USA itself.

Big banks in USA downgraded

In USA, S&P has lowered the credit ratings of big banks like Citigroup, Bank of America, Morgan Stanley, Goldman Sachs and JP Morgan Chase. S&P has differed from Moody’s with respect to Indian Banks. While Moody’s has downgraded Indian banks including the biggest bank State Bank of India, S&P has upgraded the Indian banking sector. This assessment is more or less correct but S&P should have applied stricter norms while assessing banks like Indian Bank. S&P has also assessed that RBI has moderately successful track record. Here again, one should recollect the fact that for all Indian Bank’s major credit decisions like sanction to East West Airlines, the RBI director in the board was also a party and did not raise any questions.

Deven Sharma was forced to resign because of downgrading of USA

S&P is facing a trial in Australia for its ratings of investment securities sold to many towns. Deven Sharma, President of S&P was forced to quit in September for his temerity to downgrade the long term debt of USA from AAA to AA+. He was succeeded by Douglas Peterson, CEO of Citigroup. Deven Sharma was an Indian. He was brought up in Jharkhand State. But to the credit of S&P, it resisted the pressure and refused to change its downgrade decision. In fact it warned USA that it may be further downgraded to AA in two years if things do not turn well for it.

Doctor cannot be blamed for diagnosing illness

After the downgrading of USA, S&P was blamed for the turmoil that resulted. But in my opinion, American administrators, bureaucrats, former rulers like Alan Greenspan and the people themselves are to be blamed for the economic ills that plague USA today. Please read the link ‘Will US economy recover in 2012’ for further details. When a doctor diagnoses the ill, you cannot curse the doctor for it. Rating agencies like Moody’s and S&P are required to diagnose the ills of the economy and individual companies. This is their job. If they do their job perfectly, you cannot curse them. If the police do their job and catch the criminals, you cannot blame them because it is their job for which they are paid for. USA could have applied pressure to demand the head of Deven Sharma because it could serve as a warning to other credit agencies and also the new President of S&P. But the credit agencies should not succumb to such pressure and should do their jobs perfectly.

S&P should not bend its knees before the Dada USA

US Justice Department is reportedly looking into the matter as to whether S&P improperly downgraded USA. To me, all these things appear meaningless. America was on the precipice of collapse and default to the creditors. Only a last minute agreement hammered out after much acrimony between the Democrats and the Republicans bailed out USA. This was for everybody to see. Rating agencies were justified in downgrading USA on this count alone. What is the impropriety about it? It is all a pressure tactic. US government has demanded this enquiry just to threaten S&P and other rating agencies to be careful in future while taking such decisions. But the credit agencies are unlikely to bend their knees before the Dada USA.

Similar names misleading

S&P has declared that there was no threat to India’s sovereign ratings. Indian government has heaved a sigh of relief on this count. But S&P has given warning to countries of Asia-Pacific including India that these nations may face the impact acutely if world economy suffers a renewed slowdown. S&P Foundation has launched three residential projects at an investment cost of Rs.4000 crore. It is a real estate company and to the best of my knowledge has no connection with S&P. The name is misleading as it gives an impression as though the real estate company is connected with the credit rating agency S&P. S&P should look into such matters and should ensure that nobody starts any company with similar names as otherwise investors will be fooled and confused. S&P is positive on three IT firms namely Wipro, Infosys and TCS. IT industry in India should be relieved of any concern because of international economic slowdown.

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