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FT and S&P - conventional wisdom : why we should care

by Agnes a Paris Tue Mar 28th, 2006 at 05:27:32 AM EST

Update [2006-3-29 9:54:48 by AgnesaParis]:
It is worth mentioning that the FT would only score a silver medal in the CW category when it comes to the French economy and specifically the CPE contract. The renown and very well-regarded ratings agency Standard & Poors published yesterday a report with some really juicy bites

France has displayed disappointing economic growth over the past three years, with GDP expansion averaging only 1.5% annually, or just slightly more than the Eurozone average. One of the big factors involved in that lackluster performance has been the low rate of labor participation. With only 70% of the working-age population actually at work, boosting the French economy without putting more of its citizens in jobs will be difficult.

Employment among the middle-age cohort of the French labor force remains high because it is virtually impossible to fire civil servants, while those in the private sector have protections almost as strong. But because of those strenuous job-protection measures, employers are simply reluctant to hire anyone in the first place, and the unemployment rate among the young is, by U.S. standards, stratospheric.


Now this report by S&P is really serious trouble.
Rating agencies very seldom comment on current affairs. They will publish a report on Russia's defaulting on sovereign debt, not on French work law. And the audience they get is much more to be taken into account than that of a newspaper, no matter how widely the FT is circulated among top management.
S&P sets the sovereign rating of almost each country in the world, and a country that has no rating can hardly tap international finance markets. France, UK, the US, like most OECD countries, are AAA rated, which is the highest rating on a AAA to D scale.
If the rating of a country is downgraded by even one notch (for France it would be AAA-, this immediately triggers investor suspicion, money fleeing the country and increases cost of government debt raising. So yes, there is a cause for worry, much more than out of standard press twisted information.

Initial diary below the fold.


Deconstructing FT articles has become such a routine exercise that the excitement is fading away.
Unless I have missed something in the evolution of their rhetoric, they did reach a climax today voicing concerns about the French economy and calling French banks Socgen and Natexis economists to testify on the economic morass the country is allegedly headed for.

The Head of Socgen Investment and Commercial banking had to give up, much to his dismay and eventually acknowledging the fierce opposition of his teams, a project to relocate the whole investment banking staff to London. Himself lives there and would give much for people to forget he is a Frenchman altogether.
As for Natexis, a massive media campaign has been recently launched for the future 3rd European banking group (after the Natexis-Ixis merger) to be branded outside the French borders, so an interview with the FT was a much-needed measure.

I was just thinking: why don't we send these FT guys some of the beautiful graphs that have been posted on ET for them to stop spreading false ideas about a retrograde, entrenched in modernity rejection France?
Or at least get them to put such articles in the opinion section, and not the front-page as it is today.
The only informative stuff is the results of a poll already published by le Monde - at least they quote the source - and an estimate of the direct impact of today's strikes on GDP: 0.1 to 0.2%, that is worth mentioning indeed!...

An Ipsos opinion poll in today's Le Monde shows 63 per cent want the prime minister to back down on labour reform. But most rightwing voters still support him, with 74 per cent of the ruling UMP party's supporters backing him to stand firm.

Ground-breaking news indeed.

The bulk of the article is a patchwork of sentences quoted out of context. I propose FT for the award of Best Conventional Wisdom newspaper.

The opinion articles in the Editor's choice at The FT.com are more appealling with catchy titles like "How French unions could find themselves irrelevant" or "France must change or live in fear" Rien que ça !

The Financial Times outlook on France : plus ça change, plus c'est la même chose

Display:
I don't think I'm cut out to do the job, since this is not my terrain of expertise. But I'll offer to proof-read and put some criticism or put questionmarks on spots I don't understand. And I would condone it, too, if we put signatures underneath it. You've my name.

I'll start of First of: what do we want to address? On top of my head

  • The fact that the rioting is enlarged
  • The unemployment number which is constantly quoted falsely or out of context.
  • That under Jospin unenmployment decreased
  • That protectionism in France is not an issue compared to the UK or USA

I'm thinking specifically now of frontpaged diaries mostly from Jerome and afew. I'm sure there's a lot more to it.

But Agnes... what happened to your underground...?

by Nomad on Tue Mar 28th, 2006 at 05:50:48 AM EST
You mean why am I out in the bush again, instead of peacefully lurking as I used to until yesterday ?  
Dunno, perhaps a misguided feeling that I can contribute something over there.
I guess there will be a lot of stop and goes -I mean days when you will see nothing of me, and days when I will write- before I manage to find the right level of attendance.
I cannot afford the luxury of spending my office hours on ET, we're in France, remember ... :)) and outside the office, real life prevails, so I am a bit at a loss.

When through hell, just keep going. W. Churchill
by Agnes a Paris on Tue Mar 28th, 2006 at 07:30:32 AM EST
[ Parent ]
Your contributions are always worth it, so in that regard I'm the more happier to see you already back to the wheel.

As to the stop and goes approach - that's how I manage ET.

by Nomad on Tue Mar 28th, 2006 at 07:33:30 AM EST
[ Parent ]
"Best Conventional Wisdom" newpaper  - nice!

I guess other awards would be "best new slant on traditional scaremongering" (in the UK probably the Daily Mail or the Telegraph).

(Didn't mean to hijack the thread and go off on a tangent.)


-----
sapere aude

by Number 6 on Tue Mar 28th, 2006 at 10:53:27 AM EST
Not at all, on the contrary, such hijacking is welcome !!

When through hell, just keep going. W. Churchill
by Agnes a Paris on Tue Mar 28th, 2006 at 11:00:14 AM EST
[ Parent ]
I send the following letter to the paper I most frequently read: NRC Handelsblad, in response to their graph they published yesterday. I noticed immediately that also here the youth unemployment numbers are based on the active group, and not the total. Hence the ongoing skew, as visible here. And of course it was nowhere mentioned this figure is based on the active group.

So I climbed the pen today. In Dutch of course.

Geachte heer/mevrouw,

In het geopinieerde stuk van redacteur Maarten Schinkel in de Economie katern van het NRC van gisteren, dinsdag 28 maart, "Frankrijk staakt tegen de bierkaai", is een verduidelijkende grafiek van de werkloosheid in procenten van de beroepsbevolking afgedrukt. Het is echter een misvatting om de hoge jeugdwerkloosheid cijfers van verschillende EU landen naast elkaar te leggen of te concluderen dat de jeugdwerkloosheid in Frankrijk 23 procent is, aangezien de jeugdwerkloosheid wordt gemeten aan de mate van de actieve groep werkzoekenden. Hiertoe worden oa Franse studenten en stagaires uitgesloten uit de groep werkzoekenden waardoor de groep werkzoekenden feitelijk kleiner is en de werkloosheid percentueel groter. Als er gerekend wordt voor de gehele groep van 15-24 jarigen blijkt Frankrijk echter een jeugdwerkloosheid van ongeveer 8% te hebben - wat ook hoog is, maar niet betrekkelijk hoger dan jeugdwerkloosheid cijfers in de VS, in het Verenigd Koninkrijk of zelfs Nederland!

Het is bijzonder misleidend om de jeugdwerkloosheid cijfers te publiceren zonder aan te geven dat het hier de -actieve- werkzoekende populatie betreft van de jeugd. Zoals het NRC Handelsblad deze grafiek heeft gepubliceerd is feitelijk een onwaarheid. Hierdoor wordt het jeugdwerkloosheid cijfer van Frankrijk (en waarschijnlijk ook andere EU landen) onterecht uitvergroot. De afwezigheid van deze cruciale verduidelijking in de legenda of in het artikel van de heer Schinkel is mijns inziens ten minste een correctie waard.

Bron: http://www.eurotrib.com/story/2006/3/28/85714/5270

Met vriendelijke groeten,

If you're interested in an English equivalent, say so...

by Nomad on Wed Mar 29th, 2006 at 05:56:09 AM EST
BTW, I don't know to what extent people around here are familiar with rating agencies (S&P, Moody's and Fitch) and how the ratings they issue affect the destiny of our countries, local governments, companies.
Would it be worth a diary ?

When through hell, just keep going. W. Churchill
by Agnes a Paris on Wed Mar 29th, 2006 at 10:41:14 AM EST
If they have half the effect that credit reporting agencies have on people, it has to be devastating. They also have the same effect on the ability of private companies to finance themselves by issuing bonds.

However, credit ratings that hinder irresponsible lending and borrowing are a good thing. What I am interested in is, to what extent the rating of countries (and to a lesser extent of companies) is politically motivated? What is the rate of US government debt, and what would need to happen for it to be downgraded?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 10:44:54 AM EST
[ Parent ]
I grab something to eat and I'll get back to you on this.

When through hell, just keep going. W. Churchill
by Agnes a Paris on Wed Mar 29th, 2006 at 01:32:28 PM EST
[ Parent ]
Okay, here we go.
First a definition from S&P themselves

Issue credit ratings are based, in varying degrees, on the following considerations:
1.Likelihood of payment--capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
2.Nature of and provisions of the obligation;
3.Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.

To put it more clearly, a sovereign rating is the result of political and macro-economic data assessment.
As to the way those criteria interact, it takes more than a simple post, perhaps even a diary.

US Government bonds are obviously rated AAA.<s>

What would push the USA sovereign rating down ? this is a good topic for a PhD essay. Who volunteers ? :)

When through hell, just keep going. W. Churchill

by Agnes a Paris on Wed Mar 29th, 2006 at 02:10:39 PM EST
[ Parent ]
One more thing. The current rating of a conterpart (country, local government, corporate, financial institution) is strongly influenced by the default history of that counterpart.
S&P and, likewise, Moodys' rely on a huge database of sovereign and corporate defaults.
The USA not having defaulted on their sovereign debt for ages is certainly is strong driver of their AAA rating.

BTW, GM has just been put on creditwatch with negative implications, which means they'd better behave well in the next few months...

When through hell, just keep going. W. Churchill

by Agnes a Paris on Wed Mar 29th, 2006 at 02:15:59 PM EST
[ Parent ]
According to S&P,
The rating on the United States of America rests on its high level of wealth, strong economy, and solid track record of predictable and prudent economic policies.
In addition, the rating reflects the distinct advantages afforded it by the U.S. dollar's unique role as the world's reserve currency.
These strengths continue to outweigh persistent fiscal deficits, low household savings, and the associated deterioration of the country's external debtor position.


When through hell, just keep going. W. Churchill
by Agnes a Paris on Wed Mar 29th, 2006 at 02:18:59 PM EST
[ Parent ]
Worth a diary in itself, really. This is the New Fact for today for me.

But Migeru's question intrigues: What I am interested in is, to what extent the rating of countries (and to a lesser extent of companies) is politically motivated?

It's one thing to lambast the FT, the NYT, IHT, The Economist and so on. Journalist are motivated to write stuff based on corporate business and the memes that get passed down from the higher ups, (certainly if you'd believe the stories about FoxNews).

It's another thing to step to the fore and criticize on similar grounds the holy temples of economics. We've had rabid discussion on Greenspan and the Fed and to me it seems (as an ignorant observer) that economic ideology sways the decision direction of the Fed. Even here political motivations were suspected. But in how far are these ideologies present in for example in Standard and Poor's?

by Nomad on Wed Mar 29th, 2006 at 04:39:20 PM EST
[ Parent ]
That's precisely the reason why I think it's more serious when S&P write such things on France.
I will try and come up with something by Friday.

When through hell, just keep going. W. Churchill
by Agnes a Paris on Wed Mar 29th, 2006 at 04:52:10 PM EST
[ Parent ]
Well, can you imagine the political impact of S&P or Moody's downgrading the USA from AAA to AA?

The much anticipated [around these parts, at any rate] collapse of the system might be triggered by just that (people would try to dump their bonds, there would be a run on the dollar...).

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 04:54:27 PM EST
[ Parent ]
And therefore I find it pretty remarkable that this is  practically the first time I bump into this subject on ET. Just when you think you've scratched the surface... More surface. (I've got stocks myself (French ones!) and I did figure out one day that their rating AAA is a Good Thing, but then I shrugged and moved on...)

But define political... Your example sounds more like an economic impact. The implication of your question, however, is that a political impact can become disguised as an economical one.

So in that sense, I'll also eagerly await Friday and the Return of Agnes...

by Nomad on Wed Mar 29th, 2006 at 05:06:01 PM EST
[ Parent ]
but I've been off sick today so not much brain capacity available, and I'm travelling to London tonight for a computer free-quality time week end. I'll try and pull the guts of a diary early next week.
Plus tehre is a lot of interesting stuff being posted today and should be more over the week end.

When through hell, just keep going. W. Churchill
by Agnes a Paris on Fri Mar 31st, 2006 at 09:26:00 AM EST
[ Parent ]
Feared, not anticipated.
by Colman (colman at eurotrib.com) on Wed Mar 29th, 2006 at 05:16:07 PM EST
[ Parent ]
Not eagerly, no.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 05:16:36 PM EST
[ Parent ]
Why so ?? I hope you forgot a <snark> in you post ?...

When through hell, just keep going. W. Churchill
by Agnes a Paris on Thu Mar 30th, 2006 at 02:36:48 AM EST
[ Parent ]
Well, I ckecked the dictionaries and I feel windicated in that the first meaning of "anticipate" does not imply desire:
1. regard as probable; expect or predict: she anticipated scorn on her return to the theater.  ∎   guess or be aware of (what will happen) and take action in order to be prepared: they failed to anticipate a full scale invasion.  ∎   look forward to: Stephen was eagerly anticipating the break from the routine of business.  ∎   use or spend in advance.


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Mar 30th, 2006 at 03:24:45 AM EST
[ Parent ]
Perhaps someone can explain to me how the ability to fire people more easily will boost the labor participation rate?

Is it that the fear that once a firm hires someone they will never be able to let them go in case of a business downturn? If that is the case, isn't the real problem then, that firms don't see any possibilities for growth?

This sounds like a vicious circle.

A far as S&P and the other rating agencies, their economists are just a caught up in conventional wisdom as anyone else. If they weren't so then US Treasuries would be rated B- by now.


Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Wed Mar 29th, 2006 at 03:23:29 PM EST
I am sure the French PM can explain this to you. :)
Me, I am at a loss.

When through hell, just keep going. W. Churchill
by Agnes a Paris on Wed Mar 29th, 2006 at 03:27:16 PM EST
[ Parent ]
Perhaps someone can explain to me how the ability to fire people more easily will boost the labor participation rate?

Is it that the fear that once a firm hires someone they will never be able to let them go in case of a business downturn?

As far back as I can remember, the drumbeat from business associations has been exactly that. It never made sense to me, but then again I'm not an employer.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 03:45:34 PM EST
[ Parent ]
In case of a business downturn, there is the "licenciement pour motif economique". Employers wish this procedure would disappear as it implies compensation for contract termination plus paying an outplacement agency for finding a new position outside the company.
Too expensive for employers to afford, I guess... Employees should cooperate and try and be more expandable.<snark at the system>

When through hell, just keep going. W. Churchill
by Agnes a Paris on Wed Mar 29th, 2006 at 04:04:23 PM EST
[ Parent ]
Agnes, I suppose that S&A report is not online?

As for whether the ratings agencies partake of the reigning ideology, for sure they do. They are all American in an American-capitalism-dominated world. As for their objectivity, just take the extremely slanted (Americano-business-centred) view of French employment laws in Agnes's quote, ending with this:

the unemployment rate among the young is, by U.S. standards, stratospheric.

Note the hyperbole of "stratospheric". And, above all, the assumption that the US economy is the standard by which others should be measured. These are both signs of bias.

OTOH, the actual ratings they hand out need to be seriously estimated (on their part), or they would lose credibility. I doubt if S&P would downgrade France's rating. They would most certainly be called on it.

What they are doing here, in this report, is joining their noise to that of the machine. It doesn't cost them anything.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Mar 30th, 2006 at 05:09:35 AM EST
Correct, only a small part of what S&P publishes is available on-line for free.
To access such reports as the one I mentioned yesterday, you have to pay a stratospheric (not an hyperbole) subscription fee.

When through hell, just keep going. W. Churchill
by Agnes a Paris on Thu Mar 30th, 2006 at 05:44:27 AM EST
[ Parent ]


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