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burning bridges
Credit Ratings: Who Needs Them, Anyway?

The left-wing government of Spain’s financially fragile capital city would rather not deal with the pesky organizations that evaluate its solvency. Madrid is cutting ties with S&P and Fitch as the city plans more social spending, a move that will leave the city without a credit rating within a few months. El Pais reports on the potentially catastrophic decision:

After meeting with both ratings agencies, the municipal economy and treasury department has decided not to renew the contracts next year […]

Although both agencies automatically rate countries, regardless of whether there is a commercial relationship between them or not, that is not the case with local and regional governments, which need to sign a contract just like any private company.

This is all very well so long as Madrid doesn’t want anybody to lend it money ever again. Being able to tap capital markets for infrastructure and construction projects is pretty important for a city that is interested in promoting employment, growth, and economic development, but that doesn’t seem to matter very much to Madrid’s ideological leadership.

It’s also worth noting that this move won’t just create problems with lenders. Far-sighted businesses are also unlikely to want to invest in cities that are burning the bridge to their own future. And if Madrid’s economy tanks and its credit dries up, there won’t be much money left for social spending. This won’t end well.

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  • f1b0nacc1

    They were told that there wouldn’t be any math….

  • CapitalHawk

    You call it a “potentially catastrophic decision”. Not for me. I don’t live in Madrid. If they want to slit their own throats, let them.

  • http://www.librarything.com/profile/Bretzky1 Brett Champion

    The role that credit-rating agencies play in investing decisions is, to some extent, overestimated by the general public, especially when it comes to products like general obligation government debt. The individuals and funds who invest the most money are generally sophisticated enough to understand financial statements, and if they aren’t, then they are rich enough to pay someone to figure it out for them. It’s the smaller investors who generally rely on ratings agencies’ work.

    That’s not to say that eschewing such ratings won’t be damaging to Madrid’s ability to borrow, but that’s not because not having a rating is the problem. The problem is the circumstances under which Madrid appears to be ditching the ratings agencies. It sounds like they know that what they are about to do, or at least wanting to do, will cause their credit rating to drop and so they are preemptively dropping their ratings altogether so as not to go through the “embarrassment” of having it put on paper (and paying for the privilege as well).

    As one of the buzzwords of today would have it: The optics are really bad on this for Madrid.

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