Thursday, 14 May 2009

A strange third party endorsement

Politicians just love third party endorsements. They think favourable comments from someone they can describe as an independent expert helps convince the public of the merits of their own actions. Kevin Rudd was at it yesterday in question time. 
The Opposition squirm, he told the House of Representatives:
about the fact that for the question of our temporary budget deficit for a temporary debt that will flow to the economy, we will have a temporary debt for Australia which will be the lowest by a country mile compared with all other major advanced economies. Furthermore, when you look at when our temporary debt will reach its height at 13.8 per cent of GDP, that will represent about one-seventh of the debt of the major advanced economies across the world. I would simply draw the attention of those opposite, as they try to score political capital out of this point and this necessary intervention in the economy at this stage, to what Standard and Poor’s have said overnight. They said:
Tonight’s Commonwealth budget is consistent with Australia’s triple A long-term rating for the country. The triple A rating is the highest rating assigned by Standard and Poor’s.
They go on to say: We— that is, Standard and Poor’s— believe the deficits and associated borrowings do not alter the sound profile of the country’s public finances. This is underpinned by the strength of the government’s balance sheet, which provides flexibility to absorb debt levels and cyclical deficits of this nature.
That is what the ratings agency Standard and Poor’s has concluded about the budget we delivered last night.
If you are wondering what a ringing endorsement from a ratings agency is worth then these words about the origins of the world financial crisis might help:

Its origins go back to the beginning of this decade, with the collapse of the dot com boom.

US authorities responded with aggressive cuts in interest rates.

That opened up an era of cheap debt that was accompanied by increasing financial complexity and a greater appetite for risk.

Financial products – from basic sub-prime home loans to complex financial derivatives – were built on the shallow foundations of a cheap debt economy.

Loans were advanced to millions of people, especially in the United States, with no realistic prospect of them ever being repaid. 

And those loans were financed through complex financial products that were understood by neither investors nor regulators.

The balkanisation of risk, the attenuation of risk sought the impossible dream of the elimination of risk and responsibility – so that ultimately nobody believed they carried risk and responsibility.

And through it all, the ratings agencies blessed these products as safe investments – ratings agencies that have yet to face their own day of reckoning – and the products they sanctioned continued to proliferate.

Yes, that was the verdict on ratings agencies of our very own Prime Minister addressing the National Press Club in Canberra back on 15 October last year. Strange, then, that he now so values an endorsement by one of them. Perhaps it's a case of beggars can't be choosers.
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