I WONDER SOMETIMES what induces these American ratings agencies to write their regular scare reports on the Hong Kong dollar. Moody's Investor Services has just done so again and you know this has to be pure vapour when it leaves its rating on Hong Kong dollar debt unchanged. I suppose there is the usual motive of the publicity battle between them. They do not have much to compete on in the forecasting accuracy of their ratings and therefore do it with hot air whenever they can. It is just our double misfortune that Sars has given them another opportunity and that Financial Secretary Antony Leung Kam-chung easily jumps to the bait, thus giving them yet more publicity. In this case I suspect that someone in Moody's last month looked at the gap that had once again emerged between Hong Kong and US interbank rates, a regular indication of market doubts about the strength of our peg to the US dollar, and set the wheels turning for yet another rattle of the cage. Look at the first chart and you can see that he was not quite fast enough to get his scare story published. The gap has narrowed again, even more quickly than in the two brief scares last year. Financial markets have already taken on board that Sars is under control here. The thrust of Moody's story this time was all the usual fluff that you have heard for the past two months. Economic growth will go down to 1 per cent this year because of Sars, a widening fiscal deficit will threaten the peg and people are losing confidence in the linked exchange rate system because of continuing deflation. Right, let us deal with these one by one. Economic growth in the fourth quarter last year was 5 per cent, driven by a mainland trade boom that as yet shows no sign of abating. Sars, however, does show signs of abating. I would be less hasty than both Moody's and Mr Leung seemingly are to reach up to that 5 per cent and pull it down to 1 per cent. Moody's also misunderstands the problem with the fiscal deficit. The worry in the financial markets is not specifically that we have a big one. The second chart shows you the exchange fund, our reserves, has enough money in total assets to cover a deficit for 15 years at last year's rate of HK$61 billion and enough in real savings (net of obligations to others) to cover it for 10 years. Notice that neither measure has really gone down much yet with the fiscal deficits we have so far incurred. The worry is rather that our government may not be as serious as it should be about trimming the deficit. The markets reckon that a threat to the peg would emerge eventually if the deficit continues unchecked at present levels and they are on the alert. Let us bear in mind, however, that Sars is not an indication of government profligacy. The markets will not take it as evidence of official negligence that the deficit temporarily grew larger because of the shock impact of an outbreak of disease. The key to their confidence is the extent of our government's determination to cut that deficit and Sars tells them nothing about this. Next to that matter of how much pressure there is on the peg at the moment. The third chart says that the Hong Kong dollar rose by 40 per cent against a weighted basket of the currencies of our trading partners from the end of 1988 to the end of 2001. It was locked to the US dollar throughout at HK$7.80 but the US dollar was strong throughout that period. Now, however, as the chart also shows, we have entered a period of US dollar weakness and that trade weighted Hong Kong dollar index reflects it. I can understand why some people may have thought that our currency would be under pressure for devaluation during the period of US dollar strength but can they really still think so now? Similarly, I cannot see why falling consumer prices in Hong Kong should lead to devaluation. Inflation can certainly produce weak currencies but surely our exchange rate can only be underpinned if our prices become more competitive with the rest of the world's. Could someone explain Moody's reasoning to me, please? Hot air, as I say. Forget it.