In my (too many) years writing about the credit industry, the importance of accurate credit ratings or limits has always been a hot potato, whether a particular decision is made about a small start-up or a multinational going through a sticky patch. This situation could not be better illustrated than the one we are seeing in the fallout from the US debt crisis, where the last minute deal by Congress to increase its credit card bill has brought differing reactions from the three main ratings agencies. Although Moody's has given the lawmakers the benefit of the doubt, it has already assigned a negative outlook to the USA's long -standing AAA rating, which could lead to a downgrade in the medium term if the proposals go off track. Fitch is currently maintaining its AAA rating. That said, the agency is conducting a thorough review, with a further announcement due at the end of this month. A negative outlook may be applied when this review is concluded.
Which, at the time of writing this blog, leaves Standard & Poor's, who had already placed the US on negative watch last month. The proposals by Congress to impose budget savings of $2.1 trillion are about half the amount S&P were seeking if it were to support a continued AAA rating. With its rivals showing their hands early, and severe pressure to maintain the current rating, S&P's decision is eagerly awaited. A downgrade now would be surprising, but it is still possible.
Whatever S&P's decision, if we were to apply sound credit management practice to the situation, some sort of downgrade must surely be handed down, especially if the proposals are not seen through. The eleventh hour agreement may improve the USA's ability to pay its bills now, but commercial credit ratings are not based on that ability alone. Businesses with a sound credit policy extend credit based on full financials, they consider the management team, the marketplace and much more. In our day-to-day lives, any business operating well beyond its means, relying on increased borrowing to fund its operations and obligations and promising to cut expenditure in the future, does not warrant a top rating. In the case of the USA's rating, we must also add into the mix the continued political game-playing, not forgetting probably the biggest factor, the current poor performance of its economy, an upturn in which is crucial to the success of the new deal.
As for what a downgrade would mean to the USA, the rest of the world, and indeed the dollar as the world's reserve currency, this is the subject of much debate, but an accurate credit rating would certainly be a good start!
Closer to home, but staying with sound credit management practice, it is very encouraging to see the ICM's UK Credit Managers' Index (CMI) moving from strength to strength. Our latest quarterly survey sees almost three times the number of participants as the previous Index, thanks to the engagement of our members, members of the ICM Think Tank and their organisations. With this level of participation, the Index promises to offer an increasingly detailed insight into the thoughts, attitudes and levels of confidence of UK credit professionals. Full analysis will be published soon, and look out for the next ICM UK CMI in Q3.
Philip King returns on 18 August.
