The downgrading of America is little more than a publicity stunt.
IN THE midst of the 2008-09 global financial crisis, two very influential companies squirmed out of the spotlight that should rightfully have been trained right on them.
Moody's and Standard & Poor's, two private financial firms paid by sellers and buyers to rate other financial businesses, have for decades made billions of dollars out of the practice.
Yet the core group of companies that these agencies rated so highly were the very ones that triggered the biggest crash since the Great Depression of the 1930s. These were the Wall Street investment banks peddling so-called subprime housing loans and the complex derivative financial products surrounding them.
One of these ratings agencies, Standard & Poor's, despite its tarnished reputation, has downgraded the very government that struggled so hard to clean up the mess the ratings agencies created in the first place.
Over the weekend, S&P has announced it will downgrade the US government debt (Treasury bonds) below triple-A, arguing that it was dissatisfied that the President and Congress had agreed to cut only $2 trillion out of US government programs such as pensions and Medicaid, and not the $4 trillion that S&P (and the Tea Party ''patriots'') had been demanding.
One good may emerge from this piece of nonsense.
It might just, finally, blow the whistle on the methodologies and the political nature of the actions of these ratings agencies: in much the same way as Rupert Murdoch's News of the World scandal is likely to lift the veil on the methodologies and fear-mongering techniques that have led to Murdoch's overweening influence over politics in various countries around the world.
If investors are able to shrug off what seems little more than a public relations stunt by one of the agencies - remembering that Moody's and other ratings agencies such as Fitch have retained their top ratings for US bonds - a little bit of sanity might return to the debate about the state of the international economy.
There's little doubt that these are tough times. Both Europe and the US are wrestling with the reverberations of the global financial crisis as the various governments on either side of the Atlantic confront the reality that throughout 2008 and 2009 they were obliged to bail out the privately run financial miscreants with massive injections of taxpayer monies, just to prevent a complete meltdown of the global financial system. It has been a close-run thing, and the latest aftershocks are an indicator that we have further to go.
The two organisations that I preside over, the Australian Institute of Superannuation Trustees and the Australian Council of Superannuation Investors, represent about $450 billion of monies held in trust by non-profit superannuation funds in Australia. The superannuation system has already amassed a staggering $1.3 trillion pool of patient capital that acted over the past two or three years of the global financial crisis to stabilise Australia's economy, and it is projected to grow to $4 trillion by 2025.
While we are obviously concerned at any dilution of the values of the portfolios we manage on behalf of 10 million Australian workers and their families, we're also long-term investors who aren't easily spooked by a set of bad headlines or a silly stunt by a ratings agency.
Two decades ago, when I was editor of the national business newspaper, The Australian Financial Review, Australia went through the aftermath of the great 1987 sharemarket crash and the 1991-93 ''recession we had to have'' in its wake.
At the time, it seemed like the end of the world as we knew it, with headlines every bit as alarmist as the ones that have appeared over the past week or two. (With hindsight, I regret that I was perhaps responsible for a few of them myself.)
Yet if you look at long-term graphs now, it's sometimes quite hard to pick out the downward spike on the performance graphs, growing ever smaller as time washes away the importance of that shake-up to the global financial system.
This time horizon is difficult to keep in mind when the markets seem in perpetual turmoil, but it is worth musing that Australia's retirement savings system is both world class and designed to accumulate savings built up over more than 40 years of a person's working life, not the latest three or four months.
Gerard Noonan is president of the Australian Institute of Superannuation Trustees and the Australian Council of Superannuation Investors and a former editor of The Australian Financial Review.
Frequently Asked Questions about this Article…
What did Standard & Poor's (S&P) downgrade of US government debt mean for investors?
According to the article, S&P announced it would downgrade US government debt (Treasury bonds) below a triple-A rating, saying it was unhappy that the President and Congress agreed to about $2 trillion in program cuts rather than the $4 trillion S&P demanded. The piece frames the downgrade as a contentious and possibly politically motivated move rather than a clear reflection of immediate default risk.
Did Moody’s and Fitch also downgrade US bonds after S&P’s decision?
No — the article notes that while S&P downgraded US debt, Moody’s and other ratings agencies such as Fitch retained their top ratings for US bonds, a point the author uses to suggest S&P’s action may be more of a public-relations event than a unanimous market verdict.
How did credit rating agencies contribute to the 2008–09 global financial crisis?
The article says Moody’s and Standard & Poor’s historically rated Wall Street investment banks and complex derivative products very highly. Those high ratings helped sell subprime housing loans and related securities, and the agencies were paid by sellers and buyers — a model the author implies helped create the incentives that contributed to the crash.
Are credit rating agencies free from political influence or conflicts of interest?
The article raises concerns about both political influence and conflicts of interest. It highlights that ratings firms are private companies paid by market participants and argues the S&P downgrade shows how methodologies and political considerations can shape ratings, suggesting greater scrutiny of their motives and methods is warranted.
What should everyday investors do when a major ratings agency downgrades a country’s credit rating?
The article encourages ordinary investors to stay calm and keep a long-term perspective. It suggests shrugging off what may be a publicity stunt or alarmist headline, noting that not all agencies agreed with the downgrade and that long-term investors — like large superannuation funds — aren’t easily spooked by short-term headlines.
How big is Australia’s superannuation system and why does that matter to investors?
The author states his organisations represent about $450 billion held in trust by non‑profit super funds. He also notes Australia’s broader retirement savings system had amassed about $1.3 trillion at the time and was projected to grow to $4 trillion by 2025. The point is that large pools of patient capital in superannuation can stabilise economies and are focused on long-term returns, not short-term market noise.
Could the S&P downgrade lead to more scrutiny of how ratings are produced?
Yes. The article argues one possible positive outcome is that the downgrade could finally ‘blow the whistle’ on ratings agencies’ methodologies and the political nature of some actions, prompting more public scrutiny — similar to how other high-profile scandals have exposed industry practices.
Who is Gerard Noonan and why are his views on ratings agencies and markets important for investors?
Gerard Noonan is identified in the article as president of the Australian Institute of Superannuation Trustees (AIST) and the Australian Council of Superannuation Investors (ACSI) and a former editor of The Australian Financial Review. He represents large trustee-held funds that manage retirement savings for about 10 million Australian workers, so his perspective reflects long-term institutional investors who prioritise patient capital and resilience over short-term headlines.
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