Rating and the Regulator's Dilemma:

The recent downgrading of US long term debt by S&P has created a scare among those particularly bankers who hold these assets in their portfolio as it may erode the realisable value of these assets in the short run and to that extent the soundness and safety get adversely affected. This rating, which has more of a psychological impact than that of a realistic situation, should not and need not affect banks soundness as the banks investments in such assets may not be that significant among its various other assets to worry about. The regulators interest generally is to ensure safety of each and every bank and it is for individual banks to diversify its assets based on its own assessment of various risks including market risk keeping in view and complying with regulator's guidelines. Overall stability of the financial system is the concern of both the Government and the Regulator.

The US economy can always bounce back from its economic crisis caused by heavy external debt fiscal deficit and poor GDP growth and it has all the potential and strength to put up a better show. The present downgrading should be viewed only as an eye opener and should help to review the economic policies so far pursued and initiate fresh policies in the areas of savings, infrastructure development, employment and taxation. The present approach More public Spending would stimulate demand needs to be replaced by more savings would lead to better investment, more employment opportunities, more spending and better GDP in the long run. It is a time consuming process, but end result would be lasting and enduring. It requires structural reforms in the area of taxation, income distribution, incentives for investment and generation of employment opportunities through creation of improved infrastructure in particular etc. Too much of debt would sound death-knell even if they are backed by assets.

Dr.T.V.Gopalakrishnan