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Credit agency bashers are way off the mark

Everyone from greedy Wall Street bankers, crooked mortgage brokers and hopelessly out-of-touch regulators to the cynical math geniuses who created amazingly complex financial derivatives emerged from the Great Financial Crisis of 2008 with their reputations in tatters. But few players in the scandal have been as vilified as the debt-rating agencies, which stamped their seal of approval on a host of mortgage-related and other securities that turned to be worth less than a politician's promise.

More recently, S&P, Moody's and the small handful of others who police the dark alleys of the debt world, have been taking their lumps from angry politicians for essentially telling heavily indebted and even insolvent governments to clean up their act. The alternative, as Greece and Portugal have learned, can be grim: slashed bond ratings that typically lead to dramatically higher financing costs and even worse deficit problems.

Now the mighty U.S. is facing similar threats from the debt watchers, and its coveted triple-A rating is at risk. Of course, not every government is unhappy with their assessments. Moody's has just reaffirmed Canada's triple-A rating, citing the things we love to hear, including "economic resiliency, very high government financial strength and a low susceptibility to event risk.''

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In more troubled precincts, the view persists that the bond-raters are talking so tough now because of their dreadful track record during the housing bubble years and the serious damage that did to their reputations and growth prospects. So they went almost overnight from being lax and permissive to hardnosed and punitive.

Well, that's a lot of hogwash, especially when it comes to rating sovereign debt. Moody's, S&P, Fitch and Canada's DBRS have done a pretty good job over a long stretch of gauging the health of federal, provincial, state and local finances. Just ask Bob Rae about DBRS's tough but accurate assessment of his government's worsening financial picture when he was premier of Ontario in 1992.

"Most people making the 'swing to the opposite extreme' argument probably lack ... historical perspective," says Martin Fridson, global credit strategist with BNP Paribas Investment Partners and a long-time watcher of bond watchers. "But with the benefit of that perspective, the argument becomes absurd. To believe it is valid, one must assume that the rating agencies have no institutional memory. Only in that case would it be plausible that they keep 'learning from their mistake' over and over again in every cycle."

But as Mr. Fridson points out, many of the sovereign-risk analysts have been plying their craft for years. David Beers of S&P, for example, has been at his government watchpost for two decades.

The analysts "in sovereigns, corporates and other sectors feel no obligation whatsoever to make up for shortcomings of their mortgage counterparts," Mr. Fridson argues.

"The bottom line is that sovereign borrowers who do not like the message of the rating agencies are doing what a cynic would expect them to do: They are trying very hard to shoot the messengers. Unfortunately for the sovereign borrowers, their aim is way off the mark."

At the very least, that ought to make Canadians feel even better about Moody's latest renewal of Canada's triple-A status.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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