Daily Austerity Watch: S&P’s Late Japan Downgrade

Good thing the gang at Standard & Poors is not in the weather forecasting business or else investors would be in real trouble.    This morning’s downgrade is a case in point.

S&P cut Japan’s debt outlook to negative because — to quote Bloomberg News — the “nation’s reconstruction needs following last month’s earthquake will likely add to what’s already the world’s biggest debt.”    The fact that rebuilding Japan after the devastation caused by the earthquake, tsunami and near meltdowns of its nuclear reactors would cost big bucks should surprise no one with two brain cells.   In fact, Reuters reported on March 15 that reconstruction costs would be at least $180 billion.   S&P’s estimate is $611 billion.  Given the unprecedented nature of the disaster, it’s impossible to know which figure is correct.

Nonetheless, the news is more than a month old, which makes S&P’s action tougher to take seriously.   The fact that Japan is in debt up to its eyeballs is well-known as is the news that rebuilding the country would cost quite a bit of money.   Why did it take S&P more than a month to put two and two together?  Moody’s also is a master of the obvious, pointing out that the disaster creates a “tipping point” for Japanese bonds.

Moreover, why does the media treat these sorts of  moves like they were a huge surprise, which they clearly are not.   For instance,  Bloomberg noted that the S&P move “adds to pressure on Prime Minister Naoto Kan, who has yet to detail how the rebuilding will be paid for and how he plans to rein in longer-term fiscal deficits.”  While that may be technically true, Kan and his advisers should have figured this was coming.

Ever since the global financial crisis began, credit ratings agencuies have been under pressure to publiah more accurate, timely information.   They are giving more early indicattions of their thinking.  More changes need to be made so that investors get better information. Instead, the ratings agency is once again a day late and a dollar short.

“In the wake of the recent crisis and European sovereign downgrades, questions are being asked about the usefulness of CRAs and the accuracy of
their credit risk assessments,” according to a 2010 IMF report, which argued that signals of ratings changes are more useful than the changes themselves.

S&P is about a subtle in a bull in a China shop.   The ratings agency rarely is ahead of the curve on anything.   Take its recent decision to revise its outlook on the United States to “negative” because of the lingering dispute between President Obama and the Republicans over how the tackle the debt problem. “More than two years after the beginning of the recent crisis, U.S.
policymakers have still not agreed on how to reverse recent fiscal
deterioration or address longer-term fiscal pressures,” Standard & Poor’s credit analyst Nikola G. Swann.

Again, what S&P is saying is true, but it was also true six months ago.   The President’s Fiscal Commission made a bipartisan plea last year for Congress to address the deficit last year that was widely ignored.   That would have been a more opportune time for S&P to take action.

–Jonathan Berr