David Prosser: The credit ratings agencies are getting it right at long last
Outlook: The eurozone view that a default in Greece can be brazened out may prove to be yet another example of the wishful thinking seen during this debt crisis
Tuesday 05 July 2011
Given that they performed so woefully in the run-up to the credit crisis, why should we take any notice of what the credit ratings agencies have to say about the sovereign debt crisis in the eurozone?
It would certainly suit those charged with coming up with a political solution to the question of what to do about Greece for the likes of Standard & Poor's to support them in the way they once did the issuers of CDOs. But we ought to be grateful the credit ratings agencies are not prepared to play ball – Moody's, like S&P yesterday, has said the current proposal for rolling over Greece's debt would be a default even if Europe's banks volunteer to agree.
For one thing, it is no good for those who have been so critical of the role of credit ratings agencies during the crunch – and eurozone governments have been up there with the best of them – to complain now that they are on the wrong end of more realistic assessments of debt and default.
For another, eurozone governments may not like what S&P had to say yesterday, but the rating agency's customers – those who pay it to assess the risk of borrowers not repaying what they owe – treat its views with the utmost seriousness. S&P's views – and those of its counterparts – matter because the markets think they matter.
And for yet another, it is very difficult to take issue with what S&P has to say. The crux of the French proposal for restructuring Greece's debts is that lenders would not be forced to accept the plan. Even leaving aside the question of the extent to which European banks are to be pressured into "volunteering" to accept losses on Greek holdings, the fact that losses are occurring is the textbook definition of a default. How could any self-respecting ratings agency not describe it as such?
The importance of the argument about default, by the way, is not so much the immediate impact on European banks of crystallising losses on Greek sovereign debt, but what might take place in the credit default swap (CDS) market, where the fear is of as yet unquantifiable losses for many issuers.
It was these contracts – effectively, insurance policies that pay out to borrowers if the lender cannot – that caused so much trouble after the Lehman Brothers collapse.
The prevailing view in the finance ministries of France and Germany, the other promoter of the voluntary haircut scheme, is that a technical default would not necessarily trigger demands for huge CDS pay-outs.
Isn't that just the sort of wishful thinking that saw eurozone policymakers insist for so long that Greece did not need a restructuring?
We aren't really paying off our mortgages
On the question of debt, one might see the latest Bank of England figures on equity withdrawal as good news. After all, that they show homeowners paying off debt rather than seeking to take equity out of their homes for the 12th-successive quarter suggests that over-borrowed households are finally facing up to their responsibilities after a decade of using their homes as cash machines. And we need personal debt to come down just as we want lower sovereign and corporate debt.
The problems are twofold, however. First of all, the rate of equity injection has slowed markedly since a year ago, suggesting that the squeeze on household incomes has begun to hamper people's efforts to get on top of their borrowing (a trend that leads to unhappy places such as a spike in defaults and repossessions). Second, the Bank of England does not, in any case, believe homeowners have been paying down their debt more rapidly than in the past.
Its analysis of the numbers suggests the 12 quarters of net equity injections that Britain has recorded have little to do with that and everything to do with the stagnant housing market. In particular, the number of people selling homes and not buying another property, a large source of equity withdrawal, has dwindled markedly.
Yesterday's construction figures certainly play to that theme – the big reason for the slowing in the pace of the recovery in that sector was a declining contribution from housebuilders. That sector of the economy has stabilised since the depths of the recession, but at a pretty depressing level.
Lessons from a former technology star
As one of the most famous names in British computer technology, the story of Psion is one from which today's dot.com entrepreneurs should draw both lessons and hope.
In the former category, the way in which Psion, whose hand-held devices were once a must-have for technology-savvy consumers, fell from grace is an example of how fickle this business can be. In the latter, the way in which Psion has reinvented itself since those days ought to encourage anyone wondering about the longevity of their current business plan.
As for the profits warning issued by the company yesterday, investors can, for now at least, look beyond it.
The relapse into loss for the first half is clearly disappointing, given that Psion had appeared to have put the loss-making years of the recession behind it in 2010. But the particular problems that lie beneath the warning – namely the strength of the pound and a supply chain issue affecting one of Psion's older products – should not undermine the credibility of the turnaround plan put in place at the company by John Conoley, who arrived as chief executive in 2008.
Indeed, that plan appears to be playing dividends now, with the company's order book looking much more healthy than at any time for several years. And while "rugged handheld devices" may be a market where success will not make Psion a household name once again, the opportunities are all the more exciting for that.
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