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Why credit ratings matter
In a speech to the American Chamber of Commerce of T&T, Trade and Industry Minister Stephen Cadiz delivered some good news to the business people who had gathered to attend the private sector organisation’s annual general meeting. Minister Cadiz said that Moody’s Investors Services, in its annual rating of this country’s creditworthiness, had stated that T&T Baa1 government bond ratings were “supported by relatively high levels of economic development, a very strong external position, still-low government debt levels, and a solid institutional framework.” Mr Cadiz’s announcement came on the same day that Moody’s Investors Service dealt a severe blow to the myth of the Celtic Tiger when it downgraded Ireland’s government bond ratings to junk. Moody’s cut Ireland’s ratings by one notch from Baa3 to Ba1 because it sees a growing risk the debt-ridden country will need a second bailout once its current rescue package expires at the end of 2013, wire service reports stated yesterday. The decision by Moody’s to downgrade Ireland’s bond ratings to junk came one week after the credit rating agency applied the same medicine to Portugal when it slashed the southern European country’s credit rating by four levels from Baa1 to Ba2. The reason given by the rating agency for Portugal’s downgrade to junk status was the “growing risk that Portugal will require a second round of official financing before it can return to the private market.”
On June 14, Moody’s “junked” Greece when it reduced its rating by four notches to Ba1. The credit ratings of countries are very important and it is crucial that this population understands that there are serious consequences when governments adopt measures which lead to the citizens of the country living beyond its means. The main consequence of a rating downgrade is that it almost always equates to an increase in the interest rates charged on government debt. In turn, this means that borrowing on the international capital market becomes more expensive. Just how much more expensive is indicated in the fact that the yield on Ireland’s bonds was at 13.35 per cent, compared with 11.35 per cent a month ago, while the yields on Greek 10-year yields were 16.77 per cent and Portuguese yields of equivalent maturity were 12.56 per cent. As the governments in Ireland, Portugal and Greece will soon discover, the increase in the cost of borrowing comes at a time when these countries can least afford it because of their dire economic situations.
Countries whose sovereign rating has been downgraded into junk territory also find that fewer investors are willing to hold on to their debt because many companies that make a market in the bonds of nations limit themselves to countries that are investment grade—as T&T is. The downgrading of a country’s debt often has an impact on the debt issued by companies in that country—which means that not only does the country find it more expensive to borrow, but the companies in the beleaguered country find it more expensive to borrow as well. The fact that T&T has been able to maintain its investment grade credit rating is a tribute to the fiscal prudence of the current Minister of Finance, Winston Dookeran, and his predecessor, Karen Tesheira. Both the previous and the current administrations deserve some credit for ensuring that T&T has made a soft landing in terms of its adjustment to the international financial crisis. As we move forward, citizens should keep their focus on ensuring that our political leaders do not do anything that will lead the international credit rating agencies to downgrade the country’s credit rating. This includes ensuring that the country does not spend much more in one year than it earns and that the taxation regime of the country remains relevant to the circumstances that the country finds itself in.
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