Print this article
If IFCs Want Strong Credit Ratings, Don't Put All The Chips On Banks
Tom Burroughes
23 June 2014
Jersey, the British Crown Dependency, might have had a rival international financial centre in mind recently when it crowed about a £250 million ($424.5 million)-bond issue sale that was two and half times over-subscribed – a testament, perhaps, to its high sovereign debt rating. To go further south on this point, for example, Malta – a eurozone member – saw its ratings cut by S&P in 2012, citing the woes of the single currency bloc. (The island’s ratings have held stable subsequently.) A May 2013 report by the agency looked at the relative vulnerabilities of Luxembourg, Malta and crisis-hit Cyprus. To some degree, such comments will shape the decisions of clients and service providers to pick one IFC domicile over another. As we found in the financial crisis, default risk risk ceased to be the preserve of bond trading geeks, but a part of the wider conversation. Economic sector diversity is essential for a robust rating. So perhaps one of the ironies of this is that if IFCs want a strong credit rating to attract bankers and clients, they need to do many other things besides banking - maybe wristwatches and great chocolate, for a start.
While the ratings assigned by the likes of Standard and Poor’s, Moody’s, Fitch, or others, should not be treated as Holy Writ (these agencies have, let’s put it kindly, a spotty track record on such matters in recent years), it is suggestive of how IFCs like to highlight such things. S&P recently affirmed its "AA+ / A-1+ long- and short-term sovereign credit rating, with a stable outlook", for Jersey. This publication recently issued a table, which we hope readers found valuable, of S&P ratings on a number of IFCs, as well as point out those IFCs that do not have a rating. (See here.)
This is a sensitive issue. In February this year, for example, S&P, citing concerns about global pressure on so-called tax havens, cut the Isle of Man’s credit rating from AA+ to AA. Following this development, the government of the island chose to stop paying for an S&P rating, preferring to only use Moody’s, another agency, instead. The IoM’s government has defended its decision following some criticism from the insurance industry. The island said that it is not financially sensible to pay for multiple-agency ratings, responding to queries about whether its decision over S&P smacked of “shooting the messenger”.
The ability of IFCs to finance themselves efficiently is gaining ever more importance as they are forced to become more transparent and less of a haven for potentially illicit funds. With recent automatic exchange of information treaties being signed worldwide, legitimate financial robustness becomes important. Can an IFC bail out failed banks, particularly if a sort of "parent" nation such as the UK in relation to a small IFC makes nasty noises about tax and spending? If you are registering a business or fund in A or B, the underlying financial health of such places really matters.
As we can see, when a rating is a strong one, the IFC’s cheerleaders will seize on it. A few days ago, Geoff Cook, chief executive of Jersey Finance, the organisation promoting the financial industry in the island, said of the recent bond sale: "Given that the coupon rate of 3.75 per cent compares favourably with other larger and more regular bond issues, and the considerable interest that has been shown from investors, the bond issue is a significant vote of confidence from the market in the long term future of the jurisdiction and its finance industry, the main source of government revenues."
“Of course with the inflation outlook subdued, and the continuing prospect of historic low interest rates, demand for quality bond issues is high. That said, getting a bond issue away at near big league sovereign rates is a fantastic achievement for a small jurisdiction, and testament to the underlying strength of public finances, and the strong fiscal and net asset position of Jersey as a jurisdiction,” he added.
By way of comparison, however, it is worth noting that Switzerland, facing attacks on all fronts for its bank secrecy, has the highest S&P ratings possible – AAA – as do Singapore and Hong Kong. And perhaps one factor at work here is that in a country such as Switzerland, financial services make up about 12 per cent of GDP, while the percentages tend to be bigger for the islands. (Singapore is not as "offshore" as some of the smaller places.)