Saturday, January 14, 2012

Ratings and the Lexicographer’s Quandary

Those who compose dictionaries tell us that they just reflect the reality of the language and do not impose it – they are descriptive not normative; they argue that they do not tell us how to use a word, we use it and they record our use. In practice, we know that is not true; when we disagree on the meaning of a word, we rush to the OED or Websters to resolve the question and Scrabble players must decide which is to be the judge before they start.

Ratings agencies have the same equivocal function only the stakes are a mite higher than in Scrabble.

Whenever a country is downgraded, like now, the markets and the country’s authorities go into overdrive to justify their own policies and downplay the move as if the agencies’ opinions were somehow the absolute truth. But it is worthwhile to go back to the source to see what the agencies’ ratings actually claim. This is Standard & Poor’s account of what ratings mean:

Ratings should not be viewed as assurances of credit quality or exact measures of the likelihood of default. Rather, ratings denote a relative level of credit risk that reflects a rating agency’s carefully considered and analytically informed opinion as to the creditworthiness of an issuer or the credit quality of a particular 
debt issue.

This is the sort of obfuscation worthy of Sir Humphrey Appleby or the much more direct Italian “qui lo dico e qui lo nego”. Like the lexicographers, they say that they do not impose a value; theirs is only a considered opinion. Except of course, the markets act and react on changes in ratings. Standard & Poor’s downgrading of most of the euro zone sovereign debt yesterday will certainly have effects on the cost of servicing those countries’ debts after the timid signs of recovery over the last few days. We will see on Monday when the markets reopen.

On Thursday and Friday, the difference between Italian and German bonds stayed below the psychologically sensitive figure of 500 points. Italian three-year bonds sold well and at lower interest rates than before. And Milan seemed to be regaining some of the ground it had lost. The Monti medicine, austerity now and promises of growth, seemed to be working.
Ratings agencies have another quality in common with dictionaries at least when they are being descriptive rather than prescriptive – they reflect changes that have already taken place; S & P gave a warning that they might downgrade Italy and the others early in December. And so they did, without taking into account latest developments. This might just mean that on Monday the markets will stay relatively calm.

S&P’s hammerblow arrived at almost exactly the same time yesterday evening as the huge Italian cruise liner “Costa Concordia” went aground and then keeled over. It would be tempting to use the ship as a metaphor for the Italian economy: grand, immobile, half-sunk, a wrecked fun palace with some casualties (thankfully relatively few) and thousands shivering in the winter night. Even the ship’s name has ironic resonance in a country known for discord.

The disaster is indeed a blow to Italian pride but it is not even a distorted reflection of the reality. S&P’s call for more growth is a valid one (but hardly original). The downgrade will certainly act as a prod to Monti and an instrument he can use to persuade unwilling sectors of the Italian economy to liberalise. It will also push the European authorities to move quickly to introduce real powers of monetary control if they want to save the euro. And it will no doubt accelerate moves to limit the ratings agencies possibilities of publishing sensitive opinions at difficult times. They are, after all, even more guilty of the newspapers proprietors’ aim of “power without responsibility, the prerogative of the harlot through the ages”.

The only meagre consolation for Italians (and particularly Berlusconi supporters) is to see that France and Sarkozy got their comeuppance. In real politics, though, it does mean that European leaders will have to work together with less of a heirarchy. As ever, Corriere’s Giannelli got it right again; Monti visited the pope today and Giannelli has the prime minister saying “Holiness, we need a miracle” and Ratzinger replies “I will pray in German”.

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