Economy & Trade, Headlines, Latin America & the Caribbean

FINANCE-LATAM: On a Wartime Footing Against Risk-Grading Firms

Estrella Gutierrez

CARACAS, Sep 25 1998 (IPS) - Venezuelan stockbroker Rafael Alcantara learned long ago to simply laugh it off when executives from firms in New York asked him if he knew such and such a trader from Buenos Aires.

“I don’t even try to explain to the person at the other end of the telephone line in Wall Street that Buenos Aires is so far from Caracas that it takes me two hours longer to get there than to New York or Paris,” Alcantara, the president of the ‘Casa de Bolsa Cavelba’, a stockbrokerage, commented to IPS.

The anecdote illustrates a situation that has given rise this month to a chorus of complaints throughout Latin America about the superficiality with which the region’s markets are analysed by risk-grading agencies, investment banks and traders in financial cities.

The U.S. credit-rating agencies Moody’s and Standard and Poor’s downgraded Latin America’s leading economies early this month, exacerbating losses on the stock and exchange markets just when they were taking a heavy beating from the storm unleashed by the crisis in Russia.

On Monday, Standard and Poor’s let it slip that it was considering a new downgrading of the credit rating of Venezuela and other Latin American countries. Moody’s, meanwhile, issued an upbeat report on the region’s banking system Wednesday that nevertheless gave the message that several institutions would not survive.

A European rival of the U.S. risk-grading agencies, Light IBCA, also responded by downgrading several nations in the region, in the context of the generalised loss of confidence in emerging markets due to the crash of the Russian rouble.

Analysts in Brazil, Colombia, Mexico and Venezuela have traced a parallel between the incipient backlash against the methods used by such firms and the opposition to the unilateral U.S. certification of nations as allies in the war on drugs, seen as offensive even by those who receive Washington’s stamp of approval.

Credit-rating agencies “have become a more fearsome threat for developing countries than the terrible death squads of the past,” Venezuelan President Rafael Caldera told the UN General Assembly on Thursday in New York. His remark was just part of a regional howl of protest against the situation, at the gathering.

“Discredited of the world, unite!” urges one of the ungainly characters with which Chilean cartoonist Peli illustrates reality in the Venezuelan daily ‘Economia Hoy’, summing up the increasingly hostile atmosphere toward risk-grading firms.

Venezuelan Planning Minister Teodoro Petkoff suggested something similar on Tuesday, when he stated that “if all Latin American countries begin to discredit the risk-grading agencies for their lack of professionalism,” investors will stop believing their “biased reports.”

Argentine Economy Minister Roque Fernandez took the agencies to task for their carelessness in announcing decisions at the height of the financial turbulence, knowing that by doing so they gave the final shove to turning baseless projections into reality, in what has been widely described as “self-fulfilling prophecies.”

“When you are in a room full of people you don’t shout ‘fire! fire!, because that does not solve the problem,” Fernandez remarked Sep. 4 in Washington, where seven Latin American finance ministers convened by the International Monetary Fund (IMF) upbraided the risk-grading firms.

IMF managing-director Michel Camdessus recognised on Tuesday in Paris that the downgrading of regional credit standings was a precautionary measure that responded to the financial volatility rather than to real problems. “Latin American countries were downgraded due to difficulties on the other side of the world, not theirs,” he said.

Criticism of credit-rating agencies by government leaders and the private sector from the Rio Grande to Patagonia has stressed the superficiality of analyses and the failure to distinguish among emerging markets when a crisis breaks out, thus creating a domino effect and one of artificial contagion.

Latin Americans also feel they have become the victims of a rigid overreaction by the agencies, which according to critics are trying to atone for their complacency when the global markets crisis was unleashed in southeast Asia in July 1997.

It took them four months to downgrade Thailand, the first country to fall, for example. Europe’s IBCA issued a “mea culpa” earlier this year for having failed to anticipate the crash and for underestimating the Asian contagion until the second wave occurred, in October.

“They are acting at an inopportune moment, in an overreaction of panic because they made a mistake, and with a herd mentality, seeking to whitewash their poor performance in Asia. And they discover the warm water, like when they notice only now that Venezuela’s currency is over-valued,” said Jose Grasso, president of Softline, a Caracas-based Latin American consultancy firm.

“Analyses by risk-grading firms and investors are based on a type of hasty and uncritical generalisation,” said the permanent secretary of the Latin American Economic System (SELA), Argentina’s Carlos Moneta.

“They have a dissociated world map, very memorised, with eloquent gaps in knowledge and understanding, and in which a highly subjective and new element is added to techical data on the economy: perception,” Moneta commented at SELA’s Caracas headquarters.

“The decisions do not respond coherently to a cause-effect relationship, to the real country-risk level, but to variables with emotional and psychological elements,” he added.

Minister Petkoff commented that he often grants interviews to analysts from credit-rating firms, many of whom he has found to be young greenhorns who visit the country for two or three days with a list of 100 questions, and later write up the reports that go into decisions marketed as infallible.

In his characteristic frank, ironic style, Petkoff pointed out that the credit-rating agencies had taken aim against Brazil and Venezuela once again “because we haven’t humoured them by devaluating, and they are angry.”

The unexpected recovery of the local currency, the bolivar, on the exchange market caused those who believed predictions of a devaluation to lose millions of dollars.

Without beating around the bush, Petkoff said what his counterparts in other capitals in the region have been insinuating this month: it is not a question of naive errors. Behind shifts in credit rating, and the negative or positive perceptions they generate, lie enormous interests.

Venezuelan economist Alcides Villalba compared financial ranking by the industrialised North with the much-criticised U.S. certification of how well a number of nations collaborate in anti- drug efforts.

Villalba, an expert in financial markets, said that both processes were similar “in their arrogance and high level of subjectivity,” although the economic grading has not yet triggered as strong a backlash as the anti-drug certification process.

He stressed that one problem about which there has been little talk is that risk-grading agencies are not independent entities as they claim to be, but have been involved in several scandals due to their “unconcealable links” to stock market traders, whose interests they protect – when not directly favouring them.

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