20th September 2021 > > El Salvador.

tl;dr

The rating agencies are getting it wrong again.

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A synchronised dip in all risk assets demonstrates once again that one of the pillars of investing theory – risk diversification to increase returns and reduce risk – has been made redundant by quantitative easing, yet another negative side effect of this disastrous monetary experiment. When will they learn?

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Curious Cryptos’ Commentary – Ratings agencies and El Salvador

S&P has tried to get in on the act with a statement that the adoption of BTC as legal tender has severely harmed the credit outlook for El Salvador, emphasising the “immediate negative implications” of the Bitcoin Law.

They base this conclusion on a presumption that a forthcoming $1bn loan from the International Monetary Fund (IMF) will no longer be, well, forthcoming.

This seems a stretch to me – the IMF regularly doles out taxpayers’ hard-earned money to all sorts of countries who do not always conform to western liberal norms. The amount is small, and the politics far outweigh any commercial or credit considerations.

S&P then goes on to backtrack just a touch:

“The risks associated with the adoption of bitcoin as legal tender in El Salvador seem to outweigh its potential benefits.”

Make your mind up, S&P!

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The problem here of course is that the ratings agencies are always late to the party and are frequently wrong. Debt, and the analysis of that debt, is supposed to be their area of expertise.

They completely missed the Asian crisis, which originated as a debt problem.

They completely missed the sub-prime crisis, which originated as a debt problem.

They completely missed the synthetic CDO (collateralised debt obligations) crisis, which originated as a debt problem.

In all three examples, spanning merely a decade or so, debt instruments with very high ratings – some even as high as AAA – returned just cents on the dollar to investors. In the case of synthetic CDOs sometimes they failed mere months after the product received the blessing of the ratings agencies.

My personal view – for what it is worth – is that all these problems were caused by inappropriate over-regulation designed to make the regulators’ lives easier, and not designed for customer protection.

The CCC is all in favour of appropriate, targeted regulation that fosters innovation and development.

This is the fundamental reason why regulatory competition is so important – otherwise we will end up with another sub-prime debacle centred on cryptos.

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There are some in the crypto world who will see reports like this emanating from companies like S&P and will draw conspiracy theory type conclusions. A report like this will convince some that the embedded governmental and financial structures are out to quash cryptos.

I do not agree with that world view (with the notable exceptions of China, Iran, and Russia).

I just think that S&P are largely incompetent, as is their main competitor, Moodys. Fitch less so, certainly in their analysis of financial institutions.

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I suspect that S&P use the same training program for their staff as J.P. Morgan, who are also always destined to be wrong in their thought process, wrong in their analysis, wrong in their conclusions and wrong in their recommendations to clients (see CCC 19th July 2021 and the BTC “Death Day”).