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If France Is Rated Higher Than the US!

By Marian Wang
ProPublica, Aug. 8, 2011, 5:38 p.m.

The decision by credit rating agency Standard & Poor’s to downgrade the United States [1] after markets closed on Friday may have kicked up political [2] consternation [3] and triggered a market plunge [4], but it also raises important questions about the reliability of credit ratings and, for that matter, the firms that bestow them.

Just over a dozen countries currently have an AAA [5]—or lowest-risk—rating from each of the three main rating agencies: Moody’s, Fitch, and Standard & Poor’s. Until this weekend, the United States was among them. (It’s now roughly on par with Australia, which also has two AAAs and one AA+.)

So, which countries are among the lucky few that still have perfect ratings from all three firms? The United Kingdom and France, just to name a couple. S&P apparently thinks that both the U.K. and France are safer investments than the United States.

The United States still has a higher per-capita GDP [6] than most countries, including both the U.K. and France. Last year, the U.S. GDP grew 2.9 percent [6]—almost double the U.K.’s 1.4 percent and France’s 1.5 percent. Between April and June of this year, the U.S. GDP grew 1.3 percent [7] while the U.K. economy grew 0.2 percent [8]. A June forecast from the Bank of France estimated that the country’s economy would grow 0.4 percent [9] in the second quarter. (U.S. growth, granted, is still slower than it used to be [10].)

As a percentage of GDP, both the U.K. and France have a higher percentage of external debt [11], or debt owed to outside bondholders. In 2010—the latest year for which the Organization for Economic Cooperation and Development has numbers—U.S. external debt was 61 percent of GDP, compared to France’s 67 percent and the U.K.’s 86 percent. Austria also maintains a lowest-risk rating from all three firms, and its external debt was 66 percent of GDP last year. 

Let’s not forget unemployment. Our July 2011 unemployment rate figure was 9.1 percent [10]. That’s higher than the U.K.’s, which has hovered around 7.7 percent [6], but it’s lower than France, which had 9.7 percent unemployment in June.

S&P, in explaining the historic downgrade—the first in U.S. history—cited both the U.S. debt burden and the political brinksmanship over the debt ceiling as reasons it lowered the credit rating of the United States to AA+, with a negative outlook.

So, what do the ratings mean, really? It seems to be a question that economists and investors are asking, too.

“France is not, in my view, a AAA country,” a UBS economist told Bloomberg [12]. And yet there are no indications [13] that France will face a downgrade, the Wall Street Journal reports. In fact, all three of the rating agencies recently affirmed France’s triple-As [12].

Credit rating agencies have taken a collective hit to their reputations for issuing flimsy triple-A credit ratings on securities that collapsed and helped trigger the financial meltdown. A Senate investigation earlier this year identified the firms as “a key cause [14]” of the financial crisis. Documents released by congressional investigators also pointed to serious conflicts of interest [15] that caused some ratings firms to bend to the wishes of the banks that paid for their ratings. 

Assessment

As we’ve written, some of the same problems with company culture [16] and inaccurate ratings [17] have persisted. Meanwhile, the Office of Credit Ratings—an office created by Dodd-Frank, the financial reform bill, to oversee these firms—hasn’t even been set up because Congress didn’t allocate funds for it. Other efforts written into the measure to lessen U.S. reliance on ratings and open up the firms to more liability have been slowed or stalled altogether.

Wiping out the references to credit ratings in U.S. law is a “harder task than the legislation assumes,” said Barbara Roper, director of investor protection for the Consumer Federation of America. The downgrade, she thinks, may provide just enough impetus to keep those efforts moving. 

Conclusion

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Filed under: Experts Invited, Investing | Tagged: Marian Wang, ProPublica, S&P US credit downgrade, Standard & Poor’s, US GDP | 4 Comments »