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The Lebowski Blog: Rating-Games in Ontario

Blog posts reflect the views of their authors.

Where's the f'ing money, Lebowski?

Ratings!  The life blood of any type of large loan (government or corporate) - you can't get the cash without one!

With today's rating of Ontario's debt, will Ontario be able to keep paying it's bills?
 
Ratings of big piles of debt are always carried out by rating agencies, who have a spectacular history of abysmal failure when it comes to judging safe assets but, thanks to their near oligopoly on providing ratings, have managed to survive the financial crisis with their power intact.

It works pretty simply - lets say a corporation or government wants to get a loan in the billions of dollars.  In order to figure out the interest rate for Ontario, the loaner (usually a bank or large investment company) will get one or two of the big three rating agencies (Moody's, Standard & Poor or Fitch) to give the company a grade.  Debt that is rated AAA (like the government of Canada) will usually pay a low interest while a company with a D (like former news conglomerate Canwest) will pay really high interest if anyone would bother to give it a loan to begin with.

Because of this ratings agencies are able to sink or punish companies or governments by downgrading their debt (see: Greece's economic collapse).

A ratings downgrade has been deeply on the mind of Ontario government officials.  Although the Liberals sometimes come off as wanting to cut services for fun or because it's somehow necessary, senior sources inside the government claim that it has been behind most of the major "austerity budget" decisions of the Ontario Liberals since 2009 - namely they are worried that the rating agencies will punish them for not cutting their deficit and crash their economy.

If this sounds pretty Shock Doctrin-y, that's because it is.  Ratings agencies bombed with subprime Collateralized Debt Obligation investments and crashed the global economy.  The intense "shock" of a massive economic downturn and corporate rescue caused large government deficits in Ontario.  This allows ratings agencies (instrumental to the crash in the first place) to order Ontario and other governments to work on cutting their deficit - lickity split!  Even though Ontario debt as a percentage of GDP isn't that high.

Why?  Why force companies to do this?  I'm sure it has nothing to do with the ideological assumptions of some of their biggest clients.  Clients who have absoluuuuuuuuuutley no incentive to hold governments hostage by demanding cuts for loans.

Which brings us to today's recent announcement by Dominion Bond Ratings Service (DBRS), one of a handful of new rating agencies that have been popping up in the last 20 years.  

DBRS is actually a Canadian company who rose to more prominence in Europe after the financial crisis.  Having seen the other three rating agencies completely screw up with rating risky ratings investments, many European companies are now giving DBRS a kick at the can to be a 'forth' company to rate debt.  

(Ironically, no one brings up their own Canadian rating fiasco with Asset Backed Commercialized Paper, but let's put that aside for today).

DBRS decided to weigh into the Ontario Liberal leadership race today.  Seen as a major player in the rating of debt, especially during the ratings attack on Spain, DBRS today held Ontario's debt rating at AA - low, about the same as a Canadian bank.

They praised the higher revenues from increased corporate and rich-people taxes which weren't supposed work in the first place, and ignored Bill 115 only saying that labour contracts they are trying to reach are "a “significant implementation risk.”  They also tend to ignore the misery and insane economic costs from cutting the community start-up benefit.

With a $14.4 billion deficit projected governments are making cutting that deficit its number one priority, likely hoping to buy as much time as possible hoping the economy recovers.  

But we'll see if it works.  Having been subjected to downgrades in April of 2012 by Moody's and Standard & Poor, a further downgrade might see the cost of debt shoot up and a possible Greece-style attack on Ontario.

Ah!  To be a capitalist in 2013 - able to crash economies with a single…grade.

The Lebowski blog tracks big piles of money.  It appears regularly on the Toronto Media Co-op.


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Gwalgen Dent (Gwalgen Geordie Dent)
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