Another Look At Rating Agencies

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I am going to do something very unusual tonight: I am going to write about Jamaica. Something has happened, and I would like to comment on it.

I am so glad that I have written repeatedly about Ratings Agencies. You know them, right?

• They convinced the world about the "creditworthiness" of all those exotic instruments based on subprime mortgages - CDOs, CDs etc. And because their words are taken as gospel, all these financial institutions went and overdosed on essentially worthless instruments just because the ratings agencies told them they were the greatest inventions since sliced bread. And that overdose continues to make the world ill.
  

• You remember when these same Ratings Agencies confessed in Congress that they have had a major role in the global mess we are now in, that they - the ratings agencies - were wrong and flawed. I personally found the testimony riveting. Here is the video: House Oversight Committee Hearing on the Credit Rating Agencies (October 22, 2008). Here is an interesting short piece on the hearings from ABC, if you prefer to read: Lawmakers Blame Execs For Meltdown: Congress Grilled Credit Rating Executives on Capitol Hill Today
  

• And you do remember that for some reason, no matter how much every major country complains about the need for reform of ratings agencies, these rating agencies are still allowed to rate? The G20 has already agreed that the rating agencies need reform. It cannot come quick enough.
  

Well, I am glad the record reflects that I called for rating the ratings agencies long ago: Rating the Rating Agencies. Please have a look at it. And look what I said back in October 22, 2008. Because not surprisingly today, Moody's downgraded Jamaica.

And with the greatest of respect, Jamaica may be a tropical island, but there is nothing exotic about what we offer. It's very straightforward. We borrow money to finance the budget, you know for development etc. Really straightforward. We don't take people's mortgages and do all sorts of fancy things with them and create a web of, well, air. We produce, or provide a service, or have some other way bring in revenue to repay the debt. Really straightforward.

Prior to the global economic meltdown, Jamaica's prospects were great. Lots of countries' prospects were great. We depend on bauxite - commodity prices were up, and so was demand. We depend on tourism - year on year growth in visitors and yield. We have a great tourism product. We depend on remittances - our people were employed in health, education and elsewhere in the US and the UK.

Now, did Jamaica crash the commodity prices or cause the economic slump that has depressed demand? NO. Did the ratings agencies have a role in that? YES.

Did Jamaica make people lose their savings and investments so they travel less and spend less when they travel? NO. Did the rating agencies have a role in that? YES.

Did Jamaica make people lose their jobs in the US and the UK? Did Jamaica cause massive unemployment in these countries? NO. Did the ratings agencies have a role in that? YES.

Here in Jamaica, our Constitution calls for debt repayment as the first call on revenues. We are a very proud people. We have never defaulted. No government regardless of party has ever defaulted. It is the one thing that both parties take with the absolute utmost seriousness. Investor confidence is paramount and both parties work extremely hard to make investors confident. Since the crisis, we have had visits from the leadership of the multilaterals who have provided hundreds of millions (in US$) of support. We have had a visit from Vice President Xi Jingping of China whose country provided over US$118M in aid. We have not been abandoned by either the multilaterals or our special friends. The Government has implemented a stimulus package - with minimal impact on the budget. And we have already been told to expect "hard decisions" in the upcoming budget in April. We are not sitting on our hands. We are not asking for help and being told to go away.

Now all countries in the world have reduced prospects. Every single one. Our prospects have taken a downturn because of the global downturn. Our prospects have not taken a downturn because of something Jamaica did. Therefore it is only fair that we note that it is the very action of the ratings agencies in precipitating a global economic collapse that have led those very rating agencies to downgrade us. Now is that fair?

Respectfully, it is not a foregone conclusion that Jamaica is therefore doomed. Jamaica has people of incredible spirit, will and determination. We are a country that had an Olympic bobsled team when we don't have snow. We dominated the 2008 Olympics, setting world records left and right - completely free of any form of drug scandal. See Usain Bolt. We brought the entire world Bob Marley. The whole world is in strife and we are possibly the only culture that gets along with everybody. I could go on and on and on. We are a "can do" culture. If any country will not be "depressed" in a "depression", it will be us. Finding a way is in our DNA.

It is not a foregone conclusion that ratings agencies have some monopoly on analysis. Frankly, they have been mostly wrong. If they were right, we would not be in this global mess. So am I to believe that the world will continue to take the word of the ratings agencies as gospel? Is there not merit to question their judgment? Personally, I think that this immense power to influence the market, and the lives of billions of people needs to be checked.

My two cents: Reform them, and then let them rate again. But as I said back in October, allowing them to rate after what they have done is really making the whole entire global system weaker. Rating agencies serve a critical function but to be allowed to have that degree of power, they must be subject to rules of transparency, fairness, and integrity. They must be subject to oversight.

We need a new global financial architecture urgently - and it has to be sustainable and fair for ALL. China, I'm depending on you. Germany, UK, France - yes, you all want the rating agencies reformed. But you are not now considered developing. So I'm not sure you fully comprehend what happens when investors seek information from "independent" sources like rating agencies when it comes to sovereign debt.

This weekend I'm preparing my wish list for that new global financial architecture. Look for it!