Two big news items from Queensland in the last 24 hours. Standard & Poors has downgraded the State’s credit rating to AA+ and Anna Bligh has called an early election.
The fact that these two events happened in this order is striking. Until six months ago, a government that had been downgraded in this way would be holding off an election until the last possible day in the hope of burying the bad news, or else would have gone early, before releasing the bad budget news that triggered the downgrade. Now, the government calculates:
* Everyone knows that the state’s finances are a lot weaker than they looked six months ago, and that this has very little to do with the government
* No-one who has been watching the news could possibly place any weight on ratings issued by Standard & Poors (or Moodys – Fitch has been marginally better). If credit rating agencies were subject to election, or to any kind of proper market test, these guys would be out of business. The fact that they aren’t is yet another indication that the global financial sector is in need of reform far more drastic than has been contemplated so far
* The policies ‘demanded’ by S&P to keep the rating (drastic cuts in infrastructure spending) would have been economically disastrous
Coming to the election itself, the uncertainties created by the global financial crisis are such that I’m not going to venture a prediction. Overall, the government has done a reasonable job, but not a great one, and it remains to be seen whether the cumulative impact the ethical troubles of numerous ministers, ex-ministers and backbenchers over the years will come back to haunt them. There are also a bunch of policy decisions (including some good ones, like fluoridation, and not-so-good ones like chickening out on water recycling) that need to be taken into account. And it remains unclear how much progress has been made, and perceived, in fixing the health system. The government’s performance on indigenous issues has been lamentable, but that probably won’t cost them many seats.
On the other side, the opposition moved from being unelectable to conceivably electable with the merger that created the Liberal National Party. But they remain deeply unimpressive. This election will be won, or lost, by Labor.
John Quiggin 
Yep, S&P ratings are a complete joke. Does anyone seriously believe the Qld government is more likely to default on its bonds than, say, US States – whose bonds for the most part are still AAA? Not to mention how harshly all the ratings agency treat foreign governments’ debts compared with those of US corporations (that is, their clients). John Quiggin has been making the last point for many years now.
But I guess not all punters in the street have realised what nonsense the ratings are yet, so the downgrade may hurt electorally.
There’s a description of the rating agencies complicity in the meltdown in the Michael Lewis (author of “Liar’s Poker”) article “The End” that was printed in the January 30 issue of the AFR’s Review, and which is also available online.
It amused me how Costa hung on for dear life to his little ratings gold painted plastic trophy for the NSW State Govt…after he was unceremoniously shoved.
I had a big laugh when I heard the news about S&Ps rating of Qld. The entire US financial system is an emperor with no clothes. The ratings agencies are the worst of the worst in that system. All their top management should be in jail full stop, end of story. That they should still be giving ratings of other States (and states) attire is preposterous. That they ever did is also preposterous.
I’ve never understood why any sovereign nation would or should accept financial ratings from private enterprise shysters and US corporate cowboys.
The comparison of S&P’s ratings between Austrlaian states is even more damning than their international comaprisons, because there is no obvious reason fo rthe differences. Aren’t Queensland’s public servant super liaiblities fully funded? Their default risk is surely one of the lowest of Australian states.
I think this was a predictable development by rating agencies. Having had their inability to accurately assess risk exposed, they have now shifted from over-optimistic to over-pessimistic in a desperate attempt to win back credibility. They still don’t convince me they know risk.
Back when Victoria lost their AAA rating Stockdale fixed it by moving a few assets from debt financing to equity financing, to my mind a solid indication the rating agencies aren’t even bright enough to value an asset without it being wrapped in a structure that can be quoted on a stock exchange.
Even then there ability seems to be limited to averaging the price paid for the small number of shares traded in a period and multiplying that by the number of shares.
Their ratings seem to have to relationship to reality. Buyer, seller and voter beware.
Fully concur with dd’s paragraph 1 @1.
One way to assess ‘managerial risk’ of an organisation is to look at the CV of its management. Re S&P, one finds:
http://www2.standardandpoors.com/portal/site/sp/en/us/page.managementbios/mngmnt_bios/4,3,3,0,3,0,0,0,0,0,0,0,0,0,0,0.html
http://www2.standardandpoors.com/portal/site/sp/en/us/page.managementbios/mngmnt_bios/4,3,3,0,5,0,0,0,0,0,0,0,0,0,0,0.html
http://www2.standardandpoors.com/portal/site/sp/en/us/page.managementbios/mngmnt_bios/4,3,3,0,4,0,0,0,0,0,0,0,0,0,0,0.html
The EU Commission’s latest proposal for a directive on credit rating agencies is here. I’d be surprised if the agencies had the clout to fend it off.
The EU Commission offers some marginal improvements, but the only worthwhile reform of the existing ratings agencies is abolition.
Sorry, it’s a draft regulation not a draft directive. For those of you unfamiliar with EU jargon, a regulation is the strongest form of EU law, directly enforceable without the need for national implementing legislation as for directives.
But the content isn’t IMHO very tough. It does not replace the current scheme of payment by issuer, which creates systemic conflicts of interest; and it doesn’t do anything to ensure more competition in this cosy all-American oligopoly.
If a security is intended to be quoted on a regulated exchange, why can’t the exchange front the rating fee and recover from buyers?
The Queensland government will probably be returned, but they will likely lose a lot of seats.
Recent election results show that voters are becoming harsher towards incumbent governments pretty well everywhere.
[…] News from the Sunshine State (John […]
Ernestine points out the CVs of management at S&P. If you look closely two are ex McGraw Hill execs.
“”By 2001, the focus at S&P was profits for the parent company, McGraw-Hill- it was not on incurring additional expense.”
http://www.risknews.net/public/showPage.html?page=822467
How can they be taken seriously?
[…] John Quiggin says the government is going early precisely because the people do not blame them for the crisis. […]
And it was only 3 months ago that Ken Henry when questioned seemed to indicate that maintaining the AAA rating was more important than the fiscal consequences of the required NSW mini budget! I wonder if he still thinks that?
“However, retaining the state’s AAA credit rating was a worthy goal and losing it “would be even more negative in terms of the NSW economy”.”-SMH
Where are the apostles of v. Hayek to speak loud and clear against rating agencies?