John Ward – Do S&P Know WTF They’re Doing, Episode 93….- 28 July 2012

Standard & Poors just confirmed the UK’s triple-A status. Speaking as a Brit myself, right now I wouldn’t lend my government a corkscrew to open one bottle of Bulgarian Merlot: but S&P rationalises this mad judgement on the following risible basis:

‘We project that, despite recent weakness, the U.K. economy should begin to recover in the second half of 2012 and steadily strengthen, and we expect economic policy to continue focusing on closing the fiscal gap’

Absent from this ‘analysis’ are the following factors:

i. The British banking system is heavily exposed to Russian and Spanish debt

ii. The UK economy’s decline in Q2 was, at 0.7%, three times the expected fall

iii. 75% of UK exports are still invisible/service/financial management products. Our manufacturing base is a joke at 13%, and agriculture provides just 2% of gdp

iv. 47% of our exports are to the EU, a trading bloc at All Stop.

So on these bases, the outlook is about as stable as Syria’s at the minute. But hark, because S&P has a few other cavalier judgements to throw into the mix.

* ‘We are affirming our ‘BBB+’ long-term rating on Barcelona….We forecast that the City of Barcelona should maintain what we view as healthy operating balances and gradually moderate its investments to stabilize debt, taking into account a sustained commitment to budgetary stability and solvency.’

Talking to contacts in Catalonia and Madrid last week, The Slog was unable to find a single analyst, trader or debt executive who shared that view.

* ‘We are affirming our ‘BB+’ long-term issuer credit rating and ‘ruAA+’ Russia national scale rating on RusNano. The outlook is stable, reflecting our expectation that strong ongoing state support in the form of guarantees will continue at least until 2015.’

There are two issues here –  one macro, one micro.

In a macro sense, when I say I wouldn’t lend my Government a corkscrew, I wouldn’t lend the Putin Government a cork. He is disliked widely, his economy is massively energy-export dependent in a global economy going south, and the Russians are losing influence everywhere in the Middle East.

In a micro sense, I am less than impressed with the Rusnano fund’s investment nous. It paid close to $40 million for just under five million newly issued shares in NeoPhotonics of California – equivalent to around a 17% stake. The premium at that price is bonkers: at $8 per share, Rusnano paid close to double the market price of the San Jose company’s stock.

But what do I know? I am just an humble blogger who called S&P wrong on Spain, Greece, Italy, Ireland, Portugal, Australia, and China. And indeed verily I say unto you, they were wrong.

Maybe the credit agency needs to rise above standard in order to stop being piss-poor in its forecasts. link to original article

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