There’s nothing like a credit rating threat to soften up the voting public ahead of fiscal restraint.
Moody’s warning last December that Ontario’s rating would tumble – supposedly depressing investor interest in Ontario bonds and a higher interest rate on government debt – if it didn’t rein in expenses, certainly gave the Liberals’ austerity budget an aura of sanctity last week.
But just how seriously should we take credit rating agencies?
Independent financial analyst Diane Urquhart thinks Moody’s Ontario rating has credibility, but she doubts a downward change from its current Aa1-negative rating would have much impact. Institutional investors, she says, still view Ontario’s diversified economy and stability with favour.
“You can have a downgrade without an impact on the market,” she says, drawing a parallel to last year’s controversial downgrading of the U.S. government’s debt by Standard & Poor’s. Investors, she says, simply ignored the pronouncement and carried on buying highly valued American treasury bills.
And how about interest rates, now at historic lows? Many don’t believe a lower rating would cause the government’s payments on its debt to suddenly balloon, particularly because interest rates on long-term bonds are already set.
That’s the view taken by Doug Peters, a retired bank economist and associate with the Canadian Centre for Policy Alternatives (CCPA). A lower rating, he says, wouldn’t have the effect the Libs are suggesting. “Ontario is a solid economy,” he says, “and it has the tax base. It’s just going through a period of slow economic growth and relatively high unemployment.”
Credit ratings are a matter of “splitting hairs,” says U of T finance prof Laurence Booth. The difference between a triple-A and a double-A is “pretty minor. We are talking about a good credit rating for Ontario to start with.”
As well, international investors aren’t likely to make decisions based solely on rating agencies’ opinions, he says. Rather, they will investigate any new bond or security offering on their own. “They are more likely to do an internal evaluation the longer the term of the bond.”
According to economist Hugh Mackenzie, also with CCPA, “in the real world the impact of a downgrade is widely overstated. Rating agencies are aware of the political role bonds play, and a government that has decided to take drastic action is not unhappy to be at the front of a potential downgrade.”
(A spokesperson for Moody’s says staff were too busy to respond.)
Meanwhile, Dean Baker from the Center for Economic and Policy Research in Washington, DC, points to rating agencies’ credibility gap. None, he says, have faced legal consequences for their endorsement of securities containing toxic mortgages. “There were people in the agencies trying to do their job,” says Baker. “They were basically told to shut up.”
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