THE NSW LABOR GOVERNMENT IS GUIDING US TOWARDS A 1930’S GREAT DEPRESSION
Credit ratings agencies will be down graded, about time it was well overdue. Due mainly to the global financial crash Governments world wide have been forced to move rapidly to ensure that tainted assessments will never again endanger economic stability.
The Rudd Government introduced legislation on Thursday November 13 which should go some way towards eradicating the conflicts of interest that allowed triple-A-rating to sub prime rubbish mortgages.
The Australian Securities and Investment commission (ASIC) and the Federal Treasury’s recommended changes will require agencies such as Fitch, Moody’s and Standard and Poors Ratings to secure licences in order to operate in Australia.
Theoretically independent analysis of the financial well being of companies helps markets to price risk accurately. But ratings agencies are financially reliant on the institutions they rate, and in an unregulated environment this has created massive distortions of the true risks involved with investments. The result of these distortions has been magnified by the enormous amounts invested by superannuation funds and insurance companies in triple-A-rated prospects.
Local Councils who put ratepayers’ money into the collapsed investment bank Leham Brothers lost millions of dollars. A backlash has erupted, but the NSW Labor Government seems ignorant to the trend.
The NSW mini-budget release on Tuesday October 11, after Standard and Poors changed its outlook for NSW to negative, slashed spending and increased taxes in an attempt to maintain the state’s triple A credit rating. This, although the truth of the matter is that the increased cost of borrowing associated with a downgrade would be negligible.
Even Australia’s top four banks enjoy only double A ratings, and a latest study suggested a downgrade would cost NSW about between $7 million and $14 million in increased interest payments in the first year.
One must query the approach taken by NSW Premier, Nathan Rees, and his Treasurer, Eric Roozendaal, which appears to display their total ignorance in respect of finance. An emerging opinion among financiers suggests a total reliance on calculating risk simply according to mathematical models contributed enormously to the present financial meltdown.
Back in vogue is human judgment based on experience. By deferring to discredited rating agencies, the NSW Government is trying to outsource its responsibility for the handling of the State’s economy. By doing this, it endangers deepening an already serious economic downturn.
History may well be repeated if an earlier example is replicated when a similar miscalculation created an economic disaster. It was known as the Great Depression of the 1930’s.