Ratings agencies look to new targets now that ‘downgrade’ loses its power

With a revolution in fiscal and monetary policy underway courtesy of the pandemic, what’s the role of those traditional scourges of fiscal indiscipline, the ratings agencies?

Australia’s cherished AAA rating ranking from Moody’s, S&P and Fitch has been a source of pride for successive ALP and Coalition governments in the past decade.

Yet even with the Reserve Bank (RBA) all but abandoning its inflation target of 2% to 3% over time as a guide to whether monetary policy will be tightened or eased to try and support and bolster jobs growth, there’s no justification for the ratings agencies to go all feral and bring out the threat of a “downgrade”.

Central banks, such as the RBA, fully support huge increases in debts and deficits to help national economies avoid a long and debilitating recession or worse.

The new monetary policy stance here, in the US, and in other developed economies, will be driven by keeping interest rates lower for longer, even at the cost of a bounce in inflation or worse.

The RBA is prepared to spend billions to support an interest rate at or less than 0.25% for the next three years at least (and at or less than 0.10% from the November meeting) and will continue to lend tens of billions of dollars to the banks to keep credit supplied to business and consumers. Ratings group can’t criticise that stance or issue downgrade warnings because they are now meaningless.

For ratings groups like Moody’s, Fitch and S&P (which is now the hairy-chested rater of the trio), if Australia was to do this on its own, there would have been a cascade of outlook changes and downgrades that would have seen the AAA rating gone in less than a year. But because everyone is doing it, the ratings groups have been stranded and seemingly without a role for the next few years.

But Moody’s may have stumbled on a different role when it popped up with a surprise cut to the UK’s credit rating. Moody’s cut the UK’s grade one notch to Aa3, equivalent to a double-A minus rating from rival S&P Global, and said its outlook was now “stable”. Moody’s had last downgraded the UK’s rating in September 2017.

But the reasons advanced by Moody’s provided a clue to a new role for the trio as independent, non-partisan analysts of the economies of the countries they rate, not so much for debt, but as a way of telling governments, voters and debt holders what really was going on and the future prospects for growth, equity and sustainability.

Moody’s said the UK’s economic growth “has been meaningfully weaker than expected and is likely to remain so in the future”. The firm also pointed out that the Brexit vote has exacerbated the weaker economic outlook. (It didn’t mention the about-to-collapse trade deal between the UK and EU which will further weaken Britain’s economic strength in coming years.)

“Growth will also be damaged by the scarring that is likely to be the legacy of the coronavirus pandemic, which has severely impacted the UK economy.”

In addition, the country’s “fiscal strength has eroded”, with debt rising from already high levels, while the UK’s institutions and governance have been weakened.

“Policymaking, particularly with respect to fiscal policy, has become less predictable and effective. Looking forward, the self-reinforcing combination of low potential growth and high debt in a fractious policy environment will create additional headwinds,” the statement said.

Meantime, rival S&P stuck to the old mantra of debt, deficits and funding costs. S&P’s sovereign group managing director Roberto Sifon-Arevalo told Reuters that many more countries face ratings downgrades in the next year or so as COVID-19 continues to eat away at economic growth, the wellbeing of populations and the sustainability of budget and debt positions.

He said the immense costs of supporting health systems, firms and workers through the pandemic was fundamentally altering some countries’ finances for the worse.

S&P has Australia on a AAA negative outlook which implies a downgrade in the next year. That, if it happens, will not have any impact at all. S&P would be better suited abandoning its hairy-chested neoliberal approach to debt and improving its analysis of national economies, especially in the areas of equity and climate change/sustainability. Both will have a greater impact on future growth and the servicing of debt costs than any metric used in the past to measure debt and deficit.