By Brai Odion-Esene

WASHINGTON (MNI) – Standard & Poor’s has no declared preference for
either austerity nor pro-growth policies when it comes to assigning
ratings to sovereigns, but focuses instead on “a wide array of factors”
for each individual country, one of its top analysts said Friday.

In a comment posted on the firm’s website, Moritz Kraemer, S&P’s
managing director of sovereign ratings, took issue with the suggestion
by some that S&P has taken the side of greater fiscal consolidation in
the growth versus austerity debate.

“This groundless assertion assumes that rating agencies have not
only the desire, but also the ability, to effectively prescribe policy
choices on whole societies,” he said. “The explicit claim that rating
agencies have a budget-cutting bias is easily exposed as baseless by
reviewing our published analysis.”

S&P, Kraemer argued, has no bias in favor of pro-growth or
pro-austerity policies. Rather, “we look at a large array of factors,
including both economic and growth factors as well as fiscal performance
factors.”

He argued that S&P’s methodology makes this balanced approach
clear, noting that when assessing a sovereign, the firm explicitly
assigns a somewhat higher weight to economic factors than to fiscal
ones.

“This is a long way from single-mindedly ‘demanding’ more
austerity, even if it were to significantly undercut a country’s
economic prospects,” Kraemer said.

He added the impact of policy choices on sovereign creditworthiness
depends on the economic and institutional circumstances, so the rating
agency “will continue to analyze the impact of policy choices on a
case-by-case basis rather than adopting sweeping and ideological
positions in favor of a particular policy orientation.”

Kraemer noted that when S&P cut the rating on nine eurozone nations
in January, among the list where “economic heavyweights” such as France,
Spain, and Italy, and the rating agency clearly stated its opinion that
the European policy choices as agreed in the EU summit on Dec. 9, 2011,
had focused too narrowly on restrictive fiscal policy, with the fiscal
compact as the cornerstone of this approach.

The essence of this and other statements the firm has made when
downgrading eurozone sovereigns “is quite obviously at odds with the
claim that Standard & Poor’s is biased towards, or even ‘demands’, an
all-out fiscal austerity drive, without regard to the consequences,” he
said.

Kraemer also noted that in addition to willingness to pay, what
matters ultimately for a sovereign’s creditworthiness is whether a
government will be able to service its debt load.

“A government’s ability to achieve sustainable economic growth is
an important factor in analyzing this question under our criteria,” he
said, adding, “After all, the public debt-to-GDP ratio is a ratio, and
the denominator (nominal GDP) matters as much as the numerator (debt).”

Still, Kraemer acknowledged that policy choices have a bearing on
S&P’s opinion on the likelihood that a country will service its debt in
a timely manner, “and in many cases, the consolidation of public
finances may indeed be a key ingredient in safeguarding sovereign
creditworthiness.”

“We recognize, however, that in the world as we experience it,
fiscal space is not infinite, particularly for sovereigns with limited
monetary flexibility,” he said. “Governments with lower debt to GDP have
more room to maneuver as a simple algebraic matter of the
debt-sustainability formula.”

“Experience has shown that they also would have greater credibility
in the market,” he added.

So a government that has run countercyclical fiscal policy “in good
times” can enjoy countercyclical fiscal policy “in bad times,” Kraemer
said.

He cautioned, however, against mistaking this for policy advice.

“Even in instances where we consider that fiscal consolidation is
an important element contributing to safeguarding creditworthiness,
under our criteria we would not change the ratings if there were to be a
temporary slippage in the consolidation progress as long as we were to
see that a viable and credible strategy is in place to secure
sustainable public finances over a longer term,” Kraemer said.

** MNI Washington Bureau: 202-371-2121 **

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