Time to ‘regulate’ and ‘rate’ rating agencies (1)

Regarding the role or responsibility of CRAs, there are two major dimensions to the issue: first, their role in opening the path towards moral hazards and thus the current crisis and, second, their role in amplifying the magnitude and extent of the current debt crisis by their irresponsible timing and evaluation methods.

The last discussion was fueled when credit rating agency Standard & Poor's cut its outlook for Turkey's long-term foreign and local currency credit ratings from positive to stable, citing concern about external demand and terms of trade. Turkey's official as well as private reactions have been very strong because the same CRA has upgraded Greece, unreasonably and unexpectedly.

In their evaluation note on Turkey, S&P states that “less buoyant external demand and worsening terms of trade -- the price of exports compared to imports -- have, in our view, made economic rebalancing more difficult, and have increased the risks to Turkey's creditworthiness given its high external debt and the state budget's reliance on indirect tax revenues.”

In our view, this assessment of Turkey is neither correct nor reflects a dynamic assessment. Let me clarify. First of all, Turkey's overall external debt -- both public and private -- is less than 40 percent of the gross domestic product (GDP); the threshold is 60 percent of GDP. Second, the public share of total external debt is less than 13 percent of GDP. Moreover, the share of short-term debt obligations in the total public debt mentioned above is not considerable at all.

Now, we should first understand the position of the private sector in Turkey's economy. Who really is the private sector that we are concerned about? Turkey is a country fully exposed to the global markets. A large share of the financial sector has been under the control of “foreign” capital. We do not have detailed information on the composition of private sector debt. What portion of it is owned by “foreign” but also “domestic” companies? Moreover, we do not also know in detail what portion of the total private debt is composed of back-to-back credits by the same corporate groups.

Also, it is unfair to make a country assessment for Turkey based on its "deteriorating" terms of trade at a time when global economic growth is slowing down and commodity prices are pressured downwards. Furthermore, Turkey's “soft landing” became more visible by the first quarter of this year, implying that current account deficit (CAD) and inflationary pressures will be more positive in the coming period.

Considering all these facts, Prime Minister Recep Tayyip Erdoğan denounced S&P, saying its downgrading of Turkey's outlook was clouded by an "ideological approach." He also condemned the outlook revision as "very odd" and hit back at what he implied was discrimination by S&P, which had improved the outlook of crisis-hit neighboring Greece while lowering the perspective for Turkey. The Turkish prime minister also threatened not to recognize S&P as a credible rating agency.

In our view, the S&P message is not ideological at all. It is unethical in the sense that it puts the Central Bank of Turkey under pressure to change its unconventional position in fighting and managing crisis-ridden global conditions. The message is to increase policy rates and pay more interest to foreign lenders. In this regard, S&P is lobbying in favor of lenders rather than undertaking its rating responsibilities objectively.

Therefore, as of today, I am in a position to open a new file against the responsibilities and function of credit rating agencies in my next columns.