Ref: 09-038A of 14.Dec.2009 Author: Anil Selarka (Kalidas)
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Some countries do anything to get their aim achieved. They go to any length. The difficulty with the militarily powerful country like United States is that they abuse their power, become arrogant and destroy rest of the world with self centered policies. They also conceal their real intention as if they are fighting a strategic war.
There is absolutely no doubt that United States is in extremely tight corner financially, politically on home front and militarily in Afghanistan and Iraq. Its major concern on Foreign Exchange front is severe pressure on dollar. At the moment, it is trying to keep the interest rate low by printing its way out. The question is – How long? Sooner or later, it will have to come to the market for borrowing trillions of dollars so printed during last 16 months.
If China and Japan do not buy the Treasury bonds or notes, the rates will shoot up to glaring heights, placing enormous pressure on housing market. The recent visit of President Obama and Timothy Geithner (Treasury Secretary) was not for climate change or green technology. Both China and Japan have served them feelers that they will not longer be buying T Notes or Bonds in USD due to extremely high risk of devaluation and extremely low yield. This is why both President and Treasury Secretary have visited those creditor countries to pacify them. Otherwise, what Treasury Secretary has to do with carbon emission or climate change? He is facing worst climate back home.
So, instead of convincing the other countries, notably China and Japan, it is trying another strategy used during Asian Crisis. Rating and Mating game. Instead of telling China or Japan to buy US$, it will force downgrades of strategic and vulnerable countries, and indirectly telling the major Forex owners not to buy their currencies, in fact sell them. If they sell those currencies, what would they buy? One is selling something against something. Here it is US dollar. In other words, by causing downgrades of those countries below investment grade, the major creditor countries will be indirectly persuaded to buy US dollar even if it is not desirable, almost bankrupt, yields almost nothing and yet it will be made the only alternative.
For instance, Greece considered one of the tiniest and yet corrupts country where one can influence the government policies by controlling the pockets of finance ministers and other cabinet ministers. After Iceland, it was Dubai, now Greece, Spain and United Kingdom. Further, the dollar is pushed up in paper trades – by causing some affiliated or TARP recipient banks to buy the $ Index which is set up against 6 currencies – Euro, GBP, Can $, Aus$, Yen and Swedish Kroner. (I still do not understand why SKR is there in the index. There are bigger currencies like RMB, INR, and South African Rand, which represent nearly 60% of world economies.
The rating agencies like Standard and Poor and Moody would never downgrade US corporations so easily. In spite of US incurring huge trillion dollars of deficits, its status will be retained at AAA level. Why not? US has incurred debt in its own currency US$ – if there is demand, it will simply print out the dollars and hand over to the countries creditors. No country in the world has incurred default on debt denominated in its own domestic currency, because they can print their way out.
If any non-US country incurs more debt into its own currency, these rating agencies act in collusion and threaten to downgrade that country. As recently as now, India, who holds almost $300 billions of Forex reserve, bought 200 tons of gold from IMF, recorded no banking or financial problems, having fastest economic growth of 7.9% and healthy property sector, was threatened with the downgrade even below investment grade due to rising budget deficits.
How about Japan which has highest level of national debt – almost 170% of its GDP – could still be rated Investment grade AA+? Only because Japan is appeasing United States by buying US treasury on demand.
Of late the relations between Britain and USA are not that cordial. Britain is nursing the feeling that it was wrongly goaded into war. It also feels that the present banking problems at home are mainly due to United States. It is almost certain, despite pronouncement to the contrary, that Britain and United States are drifting apart. This is why UK is sought to be downgraded by the US based rating agencies like S&P and Moody’s.
The message is “if you do not meet out political objectives, we will downgrade you and force you bear higher interest cost and devalue your currencies.” Your weakness is my strength – is what they convey.
If the people sell dollars, they buy gold as last resort or buy other English speaking countries currencies like British Pound. Instead of losing “reserve currency” status to either Euro or GBP, US is indirectly influencing rating agencies to downgrade UK so that people do not buy GBP, in fact sell it, instead of holding on to it. The history shows that only two currencies in the world – GBP and US$ – have played alternate role of global reserve currency.
There is a precedent too. During Asian crisis, every thing was pushed down – currencies, bonds, equities, properties and even Gold (because Asians have affinity for gold). The only currency rising was US$. If you cause fire, close down all doors and windows except one window – that is US$ – the people will rush into that window.
Look at the full list of Countries’ rated by S&P. Almost all countries almost bankrupt running into with giant losses in trillions of dollars are listed AAA or AA, the highest investment grade. The dollar block countries who have their currencies tied to US$, are also rated AA+ because they are loyal to USA.
- The creditor country like China is rated just A+ in spite of having $2.3 trillions in Forex reserve. Can you believe that? US with giant black hole of $ 2 trillions is still rated AAA and China fully dressed up with $ 2.3 trillions of surplus parked in Forex, is rated 5 notch below to A+.
- India is rated at BBB- , slightly above investment grade, in spite of having 7.9% growth in GDP and $300 billions of Forex reserve.
- Russian Federation is rated BBB+ in spite of having huge Forex and Gold Reserve.
- South Africa is also rated lower at A+.
- Almost all commodity countries (except Canada and Australia) are rated lower investment grades. The western countries want cheaper commodities, They rate these countries downwards, so that their Interest cost goes higher, capital markets go lower, and as result currencies go lower to make their buying of commodities cheaper in USD terms.
Almost all funds and pension funds have in charter a provision not to invest into below investment grade countries. The moment country like India is downgraded below investment grade; there will be huge sell off by funds that will bring down Indian Rupee and also entire capital market. The interest rates are also forced up as consequence.
GDP is also understated in respect of commodity countries. For instance, in India 50Million tons of potato will be valued at Rs 4 per pound or just 10 Cents per pound. The same potato will be valued in USA at $ 2 per pound or nearly 20 times intrinsic value. The US GDP looks better and India’s much smaller. Then, these rating agencies use grossly understated GDP numbers to compare with their budget or trade deficits. Obviously, they will look taller, because base is very small compared to western countries.
It is high time the developing countries understand this “Rating and Mating” game and take actions to protect themselves – one of them will be to impose blanket ban for 5 to 15 years on those mischievous rating agencies. Once they are kicked out while playing dirty war games, they will be put on notice not to cause troubles in those fast developing countries. The world will be a better place to live in.
Kalidas (Anil Selarka)
Hong Kong, Ref: 09-038A of 2009.12.10
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