Credit Rating Agencies Aren't Above Scrutiny, Either

The opinions of the major ratings agencies like S&P carry a lot of weight in the financial markets. Their own reputations, however, were damaged during the financial crisis when they awarded AAA ratings to what turned out to be toxic, mortgage-backed securities. Guest host John Ydstie speaks with Nikola Swann, a credit analyst at Standard & Poor's, about some of the criticism the company's received in the wake of the decision to downgrade the U.S. credit rating.

JOHN YDSTIE, Host:

As we just heard, the opinions of the major ratings agencies like S carry a lot of weight in the financial markets. But their reputations were damaged during the financial crisis when they awarded AAA ratings to what turned out to be toxic mortgage-backed securities. Nikola Swan is a credit analyst at Standard Poor's. He joins us on the line from Toronto, to talk about his company's action and some of the criticism it's received. Thanks for being with us, Mr. Swan.

NIKOLA SWAN: You're welcome.

YDSTIE: Your company's decision to downgrade U.S. debt is, to a large extent, based on your concerns about the political deadlock in the United States. In the end, though, the Congress did manage to raise the debt ceiling but you still went ahead with the downgrade. Why?

SWAN: Right. So, we have never viewed the debt ceiling as the main focus of credit analysis. That was really a minor part of it to us. But where we do think the focus should be, in analyzing the sovereign credit of the United States, is on a - well, there are a number of strengths, right? Going through our criteria, you have quite strong monetary flexibility and quite a strong economy. But on some of the weaknesses, you have a political environment that we believe is less conducive to policymaking that is stable and predictable than has been the case in the past.

We see very little progress about how to consolidate, especially the federal budget, despite months and months of debate in Washington that has been focused, really, on little else. And when we compare that to what we view as the most relevant AAA sovereign peers - being the U.K., France, Germany and Canada - we see substantially less progress in addressing the medium-term fiscal issues in the United States.

YDSTIE: Now, some politicians, notably congressman Barney Frank, a Democrat from Massachusetts, says that under no circumstances will the government allow a default, and that whatever is necessary will be done to avoid that. Congressman Frank also criticized, heavily criticized S action. He says you're trying to recover your reputation, which was severely damaged during the financial crisis, by demonstrating how tough you can be. What's your response to that?

SWAN: We think that we have a solid track record in sovereign ratings, and we regularly publish default studies. And these have been looked at by external observers, including the IMF. And we think that - and we're comfortable with what they've said about us.

YDSTIE: Your firm, S says it will announce some further downgrades on Monday of securities that will be impacted by your downgrade of the U.S. government debt. Can you be more specific about where those additional downgrades will take place?

SWAN: I don't think that we have said exactly that we will be announcing further downgrades, but will be announcing the impact - or not - of our decision on various other rated entities. There will be some that probably would suffer downgrade as a result of the action on a sovereign, and there are others that probably would not. Some of the sectors that we're likely to say something about include a number of insurance companies as well as the debt of entities like Fannie Mae and Freddie Mac.

YDSTIE: We've been speaking with Nikola Swan, a sovereign credit analyst at Standard Poor's. Thanks for joining us, Mr. Swan.

SWAN: You're very welcome.

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