The following are questions we have received about the Weiss Sovereign Debt Ratings from readers, along with our answers.
Q. Your C grade for the U.S. sounds like a junk bond rating. How can you rate the United States that low?
A. On the Weiss Ratings scale, which ranges from A (excellent) to E (very weak), a C grade is “Fair,” two notches above junk and approximately equivalent to a triple-B on the ratings scales used by other credit rating agencies. Indeed, the U.S. Government Accountability Office (GAO) used our ratings scale as their standard when comparing rating agencies scales years ago, and their key conclusion still applies today: For Weiss, the GAO determined that the top of the “vulnerable” (“speculative” or “junk”) grade level was D+, or two notches below C. For more information on this issue, see http://weissratings.com/news/articles/weiss-sovereign-debt-ratings/2.aspx.
Q. We all know the finances of the United States government are failing all possible tests, and we all know that C is a passing grade. Why doesn’t it merit a D or an F?
A. The U.S. does score poorly on three of the key areas we review. But currently it has one important strength: The U.S. dollar is still the world’s primary reserve currency and the standard for most international transactions. This effectively compels governments and corporations around the world to hold dollars, often in U.S. Treasury securities — in effect, acting as a barrier which helps shield the U.S. from the consequences of its fiscal condition. Result: The U.S. government scores high in terms of borrowing power and market acceptance for its debt, helping to lift the overall rating to a C. If this changes, our rating will likely be downgraded accordingly. Similarly, if its other scores improve, the U.S. could also be upgraded.
Q. I can’t believe you’ve placed Estonia and Colombia in the same category as the United States. That sounds silly. Are those countries really in the same situation as the U.S.?
A. No. They are actually doing a better job of managing their government finances — year after year. But the U.S. has the advantage of a much larger economy, reserve currency status and the ability to borrow readily on global markets, which helps compensate, to some degree, for its other low scores.
Imagine two students. One gets OK grades in four subjects (like Estonia or Colombia); while another gets bad grades in some subjects but good grades in others (like the United States.)
Q. In acknowledging some of its strengths, you cite the ability of the United States to borrow and the size of its economy. But that size generates high per capita wealth, and compared to some other wealthy countries, U.S. tax rates are low. So, arguably, the country could raise enough tax revenue to cover its deficit. Is that is an underlying strength that could help explain the high credit rating it gets from the other agencies?
A. We do not know what factors truly drive the ratings of other agencies. Indeed, a recent study by the European Central Bank (ECB) raises serious questions about possibly significant discrepancies between (a) the factors the rating agencies cite as the basis for their ratings and (b) the resulting grades they assign to various countries. In our ratings model, future or potential taxing power is over-ridden by actual current revenue trends and is not a factor. Moreover, due to their potentially negative impact on economic growth, higher tax rates don’t necessarily correlate with higher tax revenues.
Q. I can see how the U.S. gets a C or even lower. But why would you give China an A? Its inner workings are shrouded in secrecy, its banks are insolvent and its government is likely to fall at almost any time.
A. The numbers on China, which are largely reliable, are strong across the board, even if you assume some exaggeration. If that changes, China will be downgraded accordingly. Moreover, our rating of China is in the tradition of Weiss Ratings: We never allow our own personal opinions or political bias to influence our ratings. We crunch the numbers and let the chips fall where they may. As we state in our white paper introducing our sovereign debt ratings,
“Weiss Ratings does not base its sovereign debt ratings on factors that are difficult to evaluate without cultural or political bias. Therefore, the ratings do not consider qualitative factors such as political stability, technological advancement, or communications and transportation infrastructure.
For more, go to page 3 of our white paper, under the heading “Weiss Ratings Relies Exclusively on Objective Principles and Procedures.”
Q. It seems as though you are ignoring important factors — like government efficiency and the strength or weakness of democratic institutions. Why?
A. These kinds of considerations are not only difficult to measure, they open a window through which cultural and political bias can penetrate the ratings process — something we think happens all too often at other ratings agencies.
Interestingly, at an early stage in the development of the Weiss Sovereign Debt Ratings, we did look at measures that consider political and infrastructural advancement, such as Euromoney’s Country Risk Rankings and the World Bank’s World Governance Indicators. But we decided it was neither advisable nor necessary to include them: Ultimately, they are still subjective. And, in any case, including them would not have significantly altered our results.
Q. Even Bulgaria gets a higher rating than the United States. That’s shocking!
A. Yes, it is, especially when you realize that the Weiss Sovereign Debt Ratings do take into account the advantages the United States has — a far larger economy and far broader acceptance for its debts in global markets. What most people don’t take into account is this sad reality: The U.S. government has used — and abused — those advantages to dig itself into a far deeper debt hole than Bulgaria.
Q. I have heard you talk about dire scenarios for the U.S. If you believe what you say, how can you still give the U.S. a passing grade?
A. We are not alone in warning that, if Washington does not make an about face and put its house in order, the U.S. will face a financial meltdown. Our C rating for the U.S. — and the dangers it implies — is completely consistent with that warning.
Q. You have said that the U.S. could lose its status as a reserve currency. How do you factor that into your model?
A. The U.S. dollar’s decline as a reserve currency — measured in terms of the percentage of dollars used by central banks for their reserves — is already under way. However, right now, compared to other currencies, the dollar is still the world’s dominant reserve currency. Here’s the key: We base our rating on current conditions — not predictions. If the U.S. continues down its current path, a downgrade is very likely. If it changes course, an upgrade is also possible.
Q. I notice that the other rating agencies rarely change their sovereign debt ratings — especially the U.S.’s, which has been in place since they first opened for business decades ago. What about yours?
A. Since the Weiss ratings are based exclusively on hard numbers — with no politics or bias — they are likely to change when the numbers change. Needless to say, we have to wait for the numbers to be reported — we can’t act on rumor. And we also consider a five-year history (with the greatest weight given to the most current data). So don’t expect instant downgrades or upgrades. But they can and will happen.
For more on our ratings process, see page 3 of our report.
Q. Why don’t you rate India, the second largest country in terms of population? And what about Singapore, one of the most important financial centers of the world?
A. Before we can rate a country, we must have the full range of data series that our model requires, some of which are hard to get or are delayed in the reporting process of each country. As soon as we have the full data set on other important countries, we will be glad to add them. But until then, we dare not speculate as to what their rating might be.
Q. You say an honest rating is needed to help spur our government into action and raise public awareness. We all agree the AAA/Aaa rating of the other agencies is probably wrong. But isn’t your statement introducing another kind of political bias into your thinking?
A. No. You are confusing (a) our ratings process with (b) the reasons why we feel an alternative to the AAA/Aaa U.S. rating is now urgently needed.
Q. How long have you been in business?
A. Dr. Weiss founded his research company four decades ago, in 1971. Initially, he focused on U.S. banks, reviewing them one by one for consulting clients. Then, in 1987, he acquired the bank ratings division of T. J. Holt & Company, which gave letter grades to 13,000 banks and S&Ls. The big breakthrough for the company occurred in 1989 when we began issuing ratings to life and health insurers, and when those ratings got the attention of the U.S. Congress and were praised by the Government Accountability Office (GAO). Today, in addition to 47 sovereign nations, Weiss Ratings covers 19,000 banks, credit unions and banks.
For more history of the Weiss companies, go here.