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As a follow-up to my post from yesterday, please see here: http://www.bloomberg.com/news/2011-08-08/s-p-seen-surrendering-to-tea-party-at-expense-of-u-s-taxpayer.html

There are two important issues mentioned in that article. First is that the debt situation of the US was known for a number of years and if at all, that rating should be lowered years ago. If an automated rating had been used, this timing issue would be avoided. This leads to the second important issue: timing can be used as a political tool. I am not saying that Tea Party in cooperation with S&P actually did that, but the possibility exists. It will always be there, since people govern such agencies and people decide what rating to issue and people are susceptible to various pressures. Additional factor is that S&P made an error in their calculations – here it does not really matter if they did or not, but again, we all now know that the possibility exists of such an error.

All of those conclusions – political involvement, timing, possibility of an error – do not help us much. We (as in all of us investors, which means pretty much almost everyone on the planet financing anything or buying shares) will suffer consequences. It is not only American issue, rating affects any country and it has global implications of great scale. I am all for warning system for investors, but it must be rid of any human involvement. Figure out a ratio, automate it and let everyone see it, just as you let people see the size of national debt.

To add a bit of oil to a burning fire, there is one more issue I want to address. If a rating will be issued too late (as it now seems to be the case with the US) there is small chance that a country will rebound. Lowered rating causes debt price to get higher, which means, that it is more difficult to pay it back. It is also more difficult to serve old debt (as some cover at least a portion of old debt with newly borrowed money – stupid practice if you ask me, but sometimes there is no choice) and hence cuts in spending need to be introduced. Of course the easiest cuts are in state jobs – pay is lowered, people are laid off, public spending is lowered etc. All this causes loss of jobs, which in turn cause loss of tax income, which in turn causes loss of monies with which the debt could be paid off. Of course another rating is lost – circle closes and a vicious spiral begins. This is now where Greece is in. The only way out is to declare bankruptcy and start everything new.

The timing is then very important. This importance though makes it a very strong political tool and we (all of us all over the world) need to avoid its abuse at all costs. We should close all rating agencies now and replace it with truly independent rating mechanism.

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