Don't Blame It On Me...

by Alan Freeman, BA'72
You could almost say that we live in a two-superpower world. There is the U.S. and there is Moody's. The U.S. can destroy a country by levelling it with bombs; Moody's can destroy a country by downgrading its bonds.
Thomas L. Friedman, The New York Times, 1995

A phalanx of television cameramen, their lights blazing, surrounds the well-dressed, dark-haired man as he tries to escape the ornate ballroom of Ottawa's Chateau Laurier Hotel after a speech to a seminar for economists. He marches purposefully ahead, refusing to answer the questions being hurled at him by a clutch of reporters. I've spoken already, is all that Vincent Truglia responds.

He is neither politician nor tycoon but, by some accounts, his decisions have as much impact on Canada's political and economic life as those of a prime minister or bank president. Truglia, MA'74, is vice-president and senior analyst with Moody's Investor's Service Inc. of New York and the man responsible for Canada's debt rating at Moody's, one of the two most influential agencies of its kind in the world.

When Moody's announced just 11 days before last February's federal budget that Canada was in imminent danger of losing its coveted Triple A credit rating, the Canadian dollar tumbled and interest rates soared. Finance Minister Paul Martin was irritated that the agency hadn't waited for his budget before speaking. But he was powerless to do anything but gripe. Two months later, Moody's carried through with its threat and Canada was downgraded by a notch to Double A-1, behind the top-rated U.S. and Japan, but still ahead of Italy.

Who is Vincent Truglia? To Linda McQuaig, author of a best-selling book on Canada's debt, Shooting the Hippo, Vincent Truglia is not a man to mess with. According to Bay St. lore, at least, he is someone all Canadians should fear. From his Manhattan office. . . Truglia has a big influence on whether or not investors around the world are willing to buy Canadian government bonds. If he gives Canada the thumbs down, the country might well expect to see the debt wall coming into view.

For all this hyped-up talk, Truglia sees himself as an economist whose job it is to assess risks for pension funds, banks and individuals who invest in the debt of governments around the world. Truglia seems to find it mildly amusing that people consider him a man who can make and break national economies at a whim. People ascribe to us far more importance than we actually have, he said in a rare media interview.

Truglia says a debt rating is just a measure of risk. It is not a judgement on whether a country is good or bad. When Moody's issues a Triple A rating the kind Canada lost in April the risk of default is well under 1 percent over a 10- to-20-year period. Even with the downgrade, the risk of Canada's defaulting remains less than 1 percent.

We're very often chosen as a metaphor for the market. There's no easy way to bring bad news. When we upgrade a country, almost nothing happens. Moody's issues its rating through a press release. The Canadian government heard the news just five minutes before everyone else. It means Canada will pay higher interest payments on its debt. (The other big New York rating agency, Standard and Poor's, has a split view of Canada, rating Canada's Canadian dollar debt at Triple A but downgrading the federal foreign currency debt to a lower Double A plus.)

The 44-year-old Truglia grew up in a middle class neighbourhood in the North Bronx. After attending a Catholic high school, he earned an undergraduate degree at Georgetown University's School of Foreign Service in Washington. Languages were his passion; he studied French, German and Chinese, and Italian during a junior year abroad.

The attraction of living in French-speaking Montreal helped bring Truglia to study economics at McGill in 1972. His master's thesis on the U.S. apparel industry argued that tariffs and quotas were a relatively inexpensive way of protecting the industry. Although intending to stay for only one year, Truglia was offered jobs at McGill and Marianopolis College and began work on a PhD. He remained at McGill until 1977, with a one-year hiatus in Dublin on a Ford Foundation Assistantship.

Truglia says he loved the diversity of views he experienced at McGill. We had Marxists, monetarists, neo-Keynesians. The debate was extremely lively. (In retrospect, he describes his own views as centrist.) That exposure to different ideologies has helped Truglia in his work as an analyst of foreign governments. Truglia enjoyed his years in Montreal but there remained one insurmountable obstacle: winter. It wasn't the depth of winter. It was the duration. So when the call came from a headhunter offering him a job at a North Carolina bank doing country-risk analysis, Truglia was intrigued. He went for an interview, but declined the job. He soon changed his mind. I was walking around the campus. It was two o'clock in the afternoon and it was 15 Fahrenheit. It was March 15. I decided it was time to go.

After two and one-half years in North Carolina, Truglia went home to New York, where he became international economist for the Irving Trust Co. For the next dozen years, he covered countries including Mexico, Chile and Peru, picking up pretty decent Spanish in the process. When a merger eliminated his job, Truglia moved briefly to the Federal Reserve Bank before joining Moody's.

At Moody's, Truglia has primary responsibility not only for Canada but for the United States, Italy, China, Hong Kong, Taiwan, Australia, New Zealand, and the European Union. Truglia warns that Canada faces serious deficit and debt problems but he cautions against exaggeration. Canada is not about to hit a debt wall. . . . Canada is not a Mexico. Yet he warns that Canadians have only begun to see the impact of deficit reduction on their daily lives. It's just the beginning. You haven't really seen what is happening in other countries.

Truglia believes that, in terms of deficit reduction, Canada will look rosy for the next few years, but Moody's is concerned with the long term. Our concern is not what's going to happen in the next year or two. Our job is to try and protect investors five and 10 years out.

And when Canada moves to the next inevitable downturn. . . and I can guarantee you it will happen, when you've got rising unemployment, will the Canadian electorate be quite as amenable to austerity under those circumstances? Truglia argues the political will for deficit reduction will recede. Canada is going to be very vulnerable to this over the next several years. . . . This is going to go on for 10 years, year after year of austere budgets. . . Indeed, Truglia notes that in one regard the Canadian reaction to Moody's is unique. It is the only country where members of its private sector are on the phone encouraging Moody's to downgrade Canada in order to pressure the government to follow through on deficit reduction plans.

Political stability is also a consideration in Canada's ranking and those of its provinces. But Vincent Truglia is not the person responsible for Quebec's downgrade from Triple A1 to A2 last May, which the Quebec government says will cost it another $26 million a year on its interest payments. Quebec is considered a subnational unit at Moody's, and someone else's responsibility. (Moody's ranks Quebec sixth out of the Canadian provinces.)

All is not doom and gloom. Truglia believes that there is a payoff for countries that deal with their debt and deficit problems. He cites the case of New Zealand, which has been going through wrenching changes over the past 10 years but is now in the position where the government can increase spending, cut taxes, and still run surpluses.

The Man from Moody's may argue about his influence. But then, why is everyone listening?