Tuesday, December 09, 2008

Politicians, Moody’s – Standard & Poors

“These errors make us look either incompetent at credit analysis or like we sold our soul to the devil for revenue, or a little bit of both.” A Moody’s managing director [Debt Watchdogs: Tamed or Caught Napping?]

There is no real reason most of us would ever know of the existence of the various international credit rating organisations like Moody’s Investors Service, Standard & Poors or Fitch Ratings. They deal with big money, in $billions, but they impact on our lives just the same.

Where they serve us little guys is by keeping a reign on the big guys, or that’s the theory until the reality began to unravel. Now these agencies stand accused of being substantially responsible for the subprime collapse.

The way it worked was that subprime mortgages were bundled up with other forms of debt into what are elegantly known as CDOs (collateralised debt obligations), each worth maybe hundreds of millions of dollars and paying an attractive rate of interest.

New South Wales

Back in September the Premier of NSW resigned, as did his treasurer Michael Costa. Both had been involved in a drawn out effort to sell off public assets, so desperate that towards the end they were using threats of credit downgrades by these ratings agencies.

There are now doubts that those threats held any substance, but veracity rarely matters when really big sticks are waved around. Regardless, there was no great enthusiasm for selling off our energy infrastructure, just as there is no enthusiasm outside the government to now sell other assets.

Like the ratings company executives our politicians must be seen as being vulnerable to greed. So what is to be achieved by selling assets? From past experience, at the very least well paid consultancies, if not even more valuable appointments.

So where does NSW stand on credit?

NSW has a debt-to-revenue ratio of less than 40 per cent. In comparison, the Germany state of Baden-Wurttemberg, also rated AAA, has a ratio higher than 150 per cent. The state’s finance are in a much better position than, for example, some Canadian provinces or many European regional governments.

Our real problems must sheet back to poor administration and a weak opposition, they all seem like second rate amateurs. Prior to last financial year, NSW households had long enjoyed the highest level of disposable income in the country, with the exception of the ACT. Someone recently suggested that the federal government appoint an administrator for this sick state, and I agree whole-heartedly.


lindsaylobe said...

Hi Cart

The confusion about public finances and debt is easily resolved and doesn’t need the blessing of credit agencies.

The reputation of the agencies has been so badly sullied they wont be taken seriously for decades to come.

Recurrent expenditure for services such as for Heath, Education, Policing and so forth is funded from recurrent state based revenues and federal grants. You should never borrow to fund these recurrent services.

However long term investment in infrastructure and capital works can also be funded from recurrent surpluses but there is nothing wrong in principle in committing to long term borrowings to fund some of those projects particularly where future revenue streams are assured.

Sensible ratios are the key so that future interest cost are consistent as a percentage of state based GDP levels.

The popularity of the so called private/ government partnership deals is highly suspect as it allows the government to falsely claim it is not borrowing any money when in reality those capital works type programs are all either contingent on a State government guarantees or are implied. From what I cam glean about those arrangements they offer no apparent advantage and should be discontinued.

The same principles apply to selling off State based energy assets which are presently self funded and pay a dividend back to the government.

The alternatives once the sales are completed is for a strangulated oligopoly with private ownership and highly regulated charges based upon trying to artificially allow the owner to receive a contrived reasonable / risk/reward return, combined with stop gap measures on capital works that mean long term investments are severely compromised.

Best wishes

Cart said...

Lindsay, thanks for that analysis. I agree entirely, though have some doubts about the suggested Rudd injection. There is close to an argument now for NSW to be put under administration while the parties and elected reps sort out there priorities. It can happen at local government level, perhaps the states need it occasionally.

Cart said...

I note Standard and Poor's don’t see any issue with their warnings… http://www.nytimes.com/2008/12/13/us/politics/13illinoiscnd.html?_r=1&hp

The Illinois attorney general petitioned the State Supreme Court on Friday to remove Gov. Rod R. Blagojevich from office, challenging his fitness to serve after his arrest Tuesday on corruption charges.

Standard & Poor’s put the state’s general obligation bonds on credit watch with negative implications this week, citing “our concern that the legal charges now facing the governor and his chief of staff may challenge the state to respond to this fiscal situation on a timely basis.”