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

Uncalled for scare- aftermath of Rating by Standard and Poor of the US.

Standard & poor's decision to bring down the US of its triple A rating has created a scare in all international markets about the health of the US economy and its repercussions world over. The rating should not be taken to view that everything has gone wrong in US and there is no scope for revival of the economy in the immediate future. No doubt, the 2008 financial turmoil had forced the authorities to go in for some economic policies which failed to bring in the desired recovery, but it should not be construed that all decisions taken were wrong and the economy has gone from bad to worse. As the saying goes, problems always come in battalion, the crisis in Europe, Japan and other parts of the developed and developing countries as well has added fuel to fire and made a mess of all well intended policies pursued meticulously in US. The rating given by S&P at best can be taken to mean that the policies pursued need a relook and fresh efforts are needed to revive the economy . The two major issues faced by the economy are debt ceiling and fiscal deficit.
Both debt and fiscal deficit which are complementary to each other, however, failed to help the GDP growth and aggravated the economic problem. Standard and Poor, without presumably going into the reasons for the lower rate of growth of GDP taking into consideration other world contributory factors for poor performance and inherent strength of the US economy which has successfully weathered earlier crises, has come out with a rating at an inappropriate time when serious thinking and measures are in progress to take the economy out of the present predicament.
The damage such a rating has done to the global economy in general and US economy in particular is something enormous and the rating agency has to be made accountable for such an unwarranted untimely rating and making it widely transparent. Advance warning by rating agencies are welcome but bringing damage to an economy and creating widespread losses and attendant consequences in the form of higher interest rates, loss of credit market and erosion of values in various securities is something undesirable and perhaps avoidable in the overall interest of the economies. Rating an instrument and rating a country are two totally different matters and there should be some standardised norms in assessing and making transparent the rating of a country. Since negative assessment compared to positive assessment has more of an adverse impact, it is advisable for rating agencies to have a different approach to caution the rated economies in the case of a negative assessment even if the assessment is very objective and accurate.

Dr.T.V.Gopalakrishnan