Overrating Agencies

As nervous investors await news of the next sovereign debt debacle, Moody’s Senior Vice President Tom Byrne gave them another reason to remain on guard this week. During an interview in Singapore on Friday, Byrne made the following comment concerning the health of the US and UK economies.

“The outlook is stable.”

Byrne’s placating remarks came in quickstep after a report from his firm earlier in the week let slip that the two massively indebted sovereigns may “test the AAA boundaries.” That report, in turn, emerged after the kafuffle in the Mediterranean regarding Greece’s ratings downgrade. Markets from The Thames to The Nile and back again immediately plunged into the red on that news. Curiously enough, gold, that safe haven bet AGAINST governmental monetary lunacy fell all week as investors piled into, wait for it…the currency of the most indebted nation in the world – the US dollar.

The whole scene reminds us of what theologian Douglas Wilson calls “The Gadarene Swine Rule.” Just because a group is in formation, the rule observes, it doesn’t mean they know where they are going.

That the Greeks are in trouble is hardly breaking news, of course… Heck, even those geniuses at the ratings agencies had time to figure it out! Fitch, one of the other ratings agencies NOT responsible for forecasting the biggest economic tsunami since (at least) the Great Depression, downgraded Greece’s sovereign rating this week from a single-A-minus to BBB+. Moody’s announced on Friday that they would visit Greece on Monday to investigate the situation on the ground. As that most famous of French seers, Michel de Nostredame, once remarked, “Arrived too late. Act already done.”

The only thing really surprising about all this brouhaha is that investors should find it at all surprising in the first place. Did they think Dubai was going to be a one off occurrence? That the same immutable laws of nature would not also apply to other overleveraged, undercapitalized economies? Not likely!

If the agencies are crying wolf, dear reader, your lamb dinner is likely already minced meat. Fitch worries that Greece’s government debt burden may reach 130% of GDP before stabilizing and that it has a poor record of debt management.

Now why pick on the Greeks, we wonder? If imprudence and debt additions are the indictments, why not haul the United Kingdom in for questioning? And what about those hot-to-trot Baltic economies? Or, for that matter, all those Gap-going, iShoppers in the US? Household liabilities for the average American family now happen to weigh in at a familiar 130% of total disposable income.

But it doesn’t take a ratings agency to figure out that consuming more than one produces must eventually end in tears…either for the spender or the lender…or both!

Your editor remembers clearly a conversation with a certain head of a certain ratings agency back when we lived in Dubai. We were writing a few pieces for a local rag there, mostly to get behind the scenes for some up-close bubble observation (which we then reported, warts and all, to readers of The Rude Awakening). We asked the gentleman whether he had any concerns over Dubai’s ability to service its skyrocketing debt load. We asked about real estate mania, rampant property speculation, and about a possible “dububble.”

We were genuinely interested, of course, but we had suspicions. And, besides, it’s not every day a lowly staff reporter gets to ask the regional head of a major ratings agency what he thinks about a seemingly imminent and obvious economic catastrophe. The certainty of his answer nailed it for us.

“It is easy to come to Dubai and look around at all the cranes and think that it’s all a bubble waiting to burst. I would caution against taking the ‘bubble’ approach,” he told us. “If you take the UAE as a whole, there are few pitfalls from a ratings perspective.”

The fellow even went so far as to cite the emirate’s strong growth in real estate as a sound economic fundamental.

Sadly, the job of a reporter is to report, not opine. Dutifully, therefore, your editor filed his story and watched as the paper printed the “expert’s” view. We had the presence of mind to quit that horrid position a short while later. Then we moved out of the UAE altogether.

In an effort to purge our conscience of the dirty “ratings expert” story, we ran off a quick rant about the place to Bill Bonner, your senior DR editor. Here’s an excerpt from that email, which, thankfully, Bill published, in these very pages.

“My short stay here in Dubai has led me to believe that Dubai & Co. is a largely unsustainable enterprise. Dubai’s lifestyle makes the average American look like a prudent, energy-conscious, environmentally friendly health nut!

“If the American economy is drunk on its own home brew of ‘irrational exuberance,’ Dubai is sucking down straight tequila shots and desperately trying to catch up. We see it here everyday as the government squanders its unearned wealth on extravagant welfare programs and ‘National Identify Preservation’ boards and committees dedicated to ‘cultural heritage association’-this and ‘watchdog for immoral behavior’-that. Then there’s the overreaching controls on the economy – price fixing, wage manipulation, rent caps…the list goes on.

And on the real estate question, “…as near as I can make out, the biggest developments – including JBR, touted as the ‘largest single-phase residential project in the world’ – are still ghost towns…

“So who’s buying all these vacant houses, streets and islands? Some, including myself, reckon speculators buy into the hype…hoping a bigger idiot will buy into it a year later and hand them a handsome return.

“The trouble is, sooner or later you’re going to run out of idiots. Even here in Dububble the supply of them is not without limit.”

In other words, Dubai’s bird was cooked long before the Thanksgiving Day announcement. Any lowly-paid staff reporter could have seen that coming.

Credulous bulls may derive peace of mind from Byrne’s “stable” outlook for the American and British economies, but anyone keeping a mental tab on the performance of the ratings agencies themselves will do well to assume otherwise.