Standard & Poor's


PUBLISHED : Friday, 19 April, 2002, 12:00am
UPDATED : Friday, 19 April, 2002, 12:00am

SO YOU THOUGHT finance and religion were quite different from each other, did you? Let me tell you that in our very own city we have a modern pantheon of self-appointed gods pronouncing on the affairs of us mortals from its Olympian heights above Central.

Zeus, with his thunderbolt in hand, is an outfit that goes by the name of Standard & Poor's (S&P) but his position is not entirely unchallenged. Occasionally, one of the other gods by the name of Moody's Investors Service has a go at how our affairs should be ordered.

This week, Zeus decided to launch one of his thunderbolts at us. Hong Kong had better watch it because it faces a downgrade in its credit rating unless the Government raises taxes to plug its budget deficit.

Cringe and cower, ye mortals. Beyond these Olympian heights in Hong Kong towers the true Olympus in New York, where Zeus and his occasional rival are really based, and from that lofty perch the view of the world is all-knowing, all-seeing.

Allow me to play the role of atheist here. We tend to take these observances from ratings agencies as God-given truth because they come with an aura of intensive mathematical application of the rules of science to the science of investment.

The difficulty here is that investment is actually more of an art than a science. What you get when you set up a rigorous system of investment analysis is a staff of analysts who park their brains under their desks when they open computer spreadsheets on top of those desks.

It is all set out for them. Why apply thought? Just apply data and the computer will do the thinking.

You do not need me to tell you that there is something wrong with this way of doing things. Two big problems ensue. The first is that the corporations being studied by these analysts also know exactly how the rigorous system works and can creatively work their way around it. They do.

The second is that you get analysts reflecting what the market already knows. The data they use is not exclusive to them. In the Enron saga S&P did indeed steadily downgrade Enron's credit rating but from levels that were too high anyway, and in line with news already in the market, right to a D rating the day after Enron pulled the plug on itself.

Here, for instance, is a comment on Enron barely five weeks before it went bust - 'Standard & Poor's has detected no lapses in the company's risk-management practices and trading discipline'.

So let us look anew at this threat to downgrade Hong Kong's rating. Yes, if we continue to run fiscal deficits we will eventually spend all our reserves. That day is at least 10 years off at the present rate of deficit and then we could always borrow money for 10 more years before our creditworthiness was seriously at risk. Seems a little early for Zeus' thunderbolt, would you not say?

Nor need either our Government and corporations worry about paying higher interest rates on their borrowings should S&P decide at an earlier date to downgrade our credit rating. Our Government has no borrowings and our corporations have their own credit ratings.

They will in any case pay what market conditions, rather than ratings agencies, say they should pay.

Zeus has clay feet here. Just remember that line - 'detected no lapses in the company's risk-management practices' - and now ask yourself what business, what gall, S&P has in assuming Olympian authority to lecture us on distant risks so soon afterwards.

I have a line of my own that applies here, one I have used before but which fits the circumstances perfectly. In two short words, sirs, one of four letters and one of three, spare us.