John Lennon dreams the lack of three groups of people in the world in his famous song “Imagine”: religious leaders, political leaders and credit rating agencies (CRA). Some may read the last one as the financial leaders, but the greedy bunch in the Wall Street, London or Hong Kong would not dare to be that bad if the CRAs were not in their pay list to play. I am not a fan of The Economist magazine but they summarized it nicely in 2009:
“If the past decade’s financial over-engineering was a crime, rating agencies were the getaway drivers.”
In case of Hanover Re with Moody’s in 2004, it was blackmail in every language.
Believe it or not, the Wall Street was not able to pay and play the CRAs until 70s. We were, instead. Yes, we, the people as genuine investors, would pay CRAs for their reports on companies. That was a fair practice but fair is the first victim of greed. The companies that needed equity from investors and lower-interest credit from banks have started paying CRAs to rate their debt issues. The amount of checks made to CRAs ranges anywhere from a couple of thousand dollars to several millions, depending on the size of the client. There is no better example of a “conflict of interest”.
Enron and WorldCom had triple-A ratings by all three CARs when they collapsed in the hands of Arthur Andersen and CRAs. Even those two scandals, which came to light in 2001 and 2002, respectively, were not enough to be a wake-up call for anyone in rating agencies or the banks or the regulator, SEC. Instead of fixing their internal procedures and raising the bar, they played the three monkeys until hell broke loose. Not a single expert out of 20,000 people employed by the three CRAs had foreseen signs of another Enron or WorldCom during the next seven or eight years. Nobody in the Wall Street or SEC had, either.
It was an old man named Warren Buffett, in a small town in Nebraska, some 2000km away from the Wall Street, to notice the accounting manipulations in Freddie Mac, even before Enron went south. Now we know what he meant when he said
“There’s never just one cockroach in the kitchen”
after selling all his shares in Freddie Mac. However, we should also keep in mind that this old man had acquired 15% of Moody’s when it became public in 2000. Moody’s also have the top rating to Freddie Mac until Warren Buffett’s warning on CNBC but downgraded the stock the next day.
In short, despite having these three crystal balls or market makers under their hands, nobody was smart, brave or decent enough to warn investors for the coming of sub-prime mortgage crisis with ripple effects all over the world, including bankruptcy of Lehman, fire-sale of Bear Stearns and Merrill Lynch, voluntary demotion of Goldman and Morgan to commercial banks, takeover of Freddie Mac and Fannie Mae by the US government, collapse of Iceland and subsequent damages in the UK and Netherlands. All of these companies, banks and countries involved had the highest ratings from CRAs until the very last day. It was David Wyss, the chief economist of S&P until 2011, telling to Associated Press one month after retiring that
“The credit agencies don’t know any more about government budgets than the guy in the street who is reading the newspaper.”
IMF calculated the loss from global recession as $4.1 trillion. That is more than five times the Turkish GDP. Compared to that, the cost of poor credit rating to Turkey is just peanuts. Suleyman Yasar of Sabah Daily calculates the difference of higher interest payments as about $6b per year. It is no small feat from local perspective. But it is also clear from the colossal losses mentioned above that Turkey is not the center of the world or the main target of CRAs.
We cannot blame CRAs for trying to run their business as usual and continue manipulating the target companies, banks and economies, possibly in coordination with certain companies and banks. Yelling at them is like charging against windmills. The financial world still operates based on their credit rating mechanism without any better alternative. What Turkey can do is to leave as little room for speculation, manipulation and destruction by CRAs as possible. We cannot kill them, ignore them or replace them. We’ll have to live with them.
CRAs are like the difficult teachers we need to somehow satisfy to get a good grade. Turkey is a perfect candidate to get that investment grade with rapid growth in major sectors like automotive, electronics, infrastructure, agriculture, tourism, healthcare and retail to name a few. There is a huge domestic demand and also the potential for expansion or export. Developments in highways, railways, airlines, tourism, agriculture and mining are particularly impressive. And yet, all that glitters is not gold.
We cannot blame CRAs for warning investors against dangers like state monopoly in telecoms turning into a private monopoly or privatization in electricity distribution ending up in a mess. Dozens of licenses in telecoms and hundreds of them in power sectors have become useless due to the lack of competition in the former and the absence of the rule of law in the latter. Know-who is still more important than know-how in these sectors. Situation in media sector is even worse.
There are three times more hospitals now but there is no mechanism in place to keep the good doctors in public payroll. And only a few private hospitals can match the CapEx buried into the state or university hospitals.
It is a great plan to invest in education by providing tablets to 15 million students in country. It is even a better idea to provide 15% lead to local production in bid price in order to curb the current account deficit. But it all gets blurry when it comes to selection of that local candidate. Tender rules keep changing. The latest news is that the project is exempted from public tender procedures. How would you rate this if you were S&P?
Equally important from foreign investors’ perspective are the political developments. There has been no civilian constitution in place for ages, and no solution to Kurdish conflict in sight. Despite all the public support in last year’s elections, work on the new constitution is kept behind doors and the Kurdish problem is more polarized than ever.
Looking at the last four paragraphs, one can say not much has changed in major areas in Turkey. If all true, let us not expect a change in our credit ratings either. We’re almost there, thanks to the growth and stability that we experience since 2002. We are one tick below the investment grade. We just need to stamp it with democracy and transparency in western standards.
See Turkish translation of this article at : Kredi Derecelendirme Hikayesinde İğne de var, Çuvaldız da.
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