Government Slams Credit-Rating Agencies

By Estrella Gutierrez, IPS, 23 September 1998

CARACAS, Sep 23 (IPS)—Venezuela's government has called for a Latin American rebellion against credit-rating agencies, which are thinking of downgrading the country's credit rating despite an unexpected appreciation of the local currency, the bolivar.

Central Bank Director Armando Leon said Tuesday that the credit- rating agencies were disoriented by the positive performance of the bolivar.

Their predictions that the Venezuelan currency was certain to be devalued in August had led to a speculative stampede on the U.S. dollar here. But for the fifth day in a row, it was the U.S. dollar which backed down before the bolivar on Tuesday, because companies that had initially taken refuge in the U.S. currency while awaiting the expected devaluation found themselves short of bolivars to meet their payments.

The value of the bolivar to the U.S. dollar improved from 589.25 to 1 on Sep. 15 to 582:1 on Sep. 22 on the foreign exchange market, because economic agents were convinced that the government would avoid a devaluation at all cost this year in spite of predictions to the contrary.

The attack on the bolivar began on Aug. 11. Last month investors sold the bolivar on the New York futures market for up to 48 bolivars below the lowest level to which it had previously sunk. But the bolivar's freefall was checked, and the currency even recovered ground, causing those who believed the devaluation predictions to suffer major losses.

We have not humoured them by devaluating, and they are irritated, said Planning Minister Teodoro Petkoff, in response to an announcement Monday by the Standard & Poor credit-rating firm that it was considering a new downgrading of Venezuela's credit rating after August's fall in the rate of the bolivar.

Petkoff told radio stations that if all Latin American countries begin to debunk the credit-rating agencies due to their lack of professionalism, investors will take a closer look at the situation in the region and try to come up with their own analysis of our reality.

And Finance Minister Maritza Izaguirre repeated Tuesday what she stated in a strongly-worded letter last Friday to the other big U.S. credit-rating agency, Moody—that Venezuela has enough funds to meet its foreign debt payments this year, a situation that will not change even if oil prices unexpectedly continue to fall.

Both Central Bank director Leon and Izaguirre said a drop in Venezuela's international reserves to below 13 billion dollars could be explained by major outlays to service the country's 22- billion-dollar foreign debt.

Petkoff said Standard & Poor and Moody produced biased reports which formed part of pressures to devalue, not only on Venezuela but on Brazil as well. The government of Fernando Henrique Cardoso has not indulged them either, he commented.

Implicitly criticising the decision of the new government of President Andres Pastrana to devalue the Colombian peso last month, Petkoff said that by doing so, the country satisfied the credit-rating agencies, with the result that no one believed in the measure, and pressure on the Colombian currency has been exacerbated.

Izaguirre told Moody's last Friday that its analyses were no longer based on a careful review of economic variables but rather governed by a herd mentality and by the simplification of measuring all emerging markets by the same yardstick.

The Venezuelan minister, a high-level official of the Washington-based Inter-American Development Bank until last June, insinuated that Moody did not act in good faith with its hasty and indiscriminate downgrading of countries' credit ratings.

According to Izaguirre, the downward spiral on the emerging markets stems from the uncertainty caused by the analyses of and downgrading by the credit-rating agencies, which respond to the resulting situation by downgrading the countries concerned yet again.

Analysts from Venezuela and other Latin American countries have described this as a vicious circle of self-fulfilling prophecies, caused by the enormous clout of the risk-grading firms.

Economist Alcides Villalba, who has held high-level technical posts under various administrations in Venezuela, wrote in an article in the Tuesday edition of the local 'El Universal' daily that it would be interesting to investigate the ties between the information agents, credit-rating agents, investors and stock exchange operators.

In Minister Petkoff's view, there were elements justifying suspicions as to the decision-making processes of risk-grading agencies. He added that the error was that the financial and productive sectors had allowed such firms to acquire an undeserved reputation of infallibility, especially when subjective perceptions took precedence over objective data.

Businessman Carlos Dorado agreed in another article in 'El Universal' with the Venezuelan government that the credit-rating firms were passing harsh judgements on Latin America in order to atone for their excessive complacency while the Asian crisis was breaking out 14 months ago.

Europe's leading credit-rating agency, Fitch IBCA, admitted in a special report on the Asian crisis that both itself and its U.S. competitors had failed to predict the debacle, despite the signs. In fact, it took the firms four months to downgrade the credit rating of the countries involved in the crisis.

Now, according to the Venezuelan government and other critics, the firms are predicting non-existent situations of insolvency, which the weight of the projections ends up turning into reality.