Rating agencies: The unaccountable oligopoly that can destroy economies

A discussion on the importance of the European Commision setting up an independent European credit rating agency

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Political economy dictates that post-recession spending cuts are absolutely necessary in order to maintain economic stability. Not because spending cuts are the only way of dealing with budget deficits (in 1945, the UK’s finances were in a far more parlous state than now and it went on to build the NHS and the welfare state without cataclysmic events ensuing), but because they are mandated by the three pre-eminent global credit rating agencies – Fitch, Moody’s and Standard & Poor’s.

Together, these three institutions operate to shield national economies from the Damoclean terror of the bond markets so long as their governments comply with the economic orthodoxy. By downgrading sovereign debt, they can throw those same economies to the wolves the moment they step out of line.

These three agencies have cornered the market in financial advice and in effect make up a global oligopoly that has the power to destroy economies through their grip on the cost of public sector borrowing.

Public sector spending cuts have been imposed on Europe in order to facilitate a return to corporate profit following the huge financial dent caused to corporations and the super-rich by the collapse of Lehman Brothers and the recessions that subsequently engulfed Western economies. 

Cuts to welfare benefits, public services and public sector jobs and conditions drive down wages in the private sector and make it easier for corporations to drive down working conditions.  Concurrently, they make it easier to implement demands for cuts to corporation tax.

Over the last two years, throughout austerity Europe, corporation tax rates have been falling. The UK government’s own cut in corporation tax from 28 to 24 per cent makes an irrelevance of the UK bank levy and will not encourage corporations to invest in jobs as tax relief on investment has also been cut.

Governments that aren’t being seen to shrink the state and cut taxes for the elite risk having their national credit ratings downgraded.

Greece’s financial trouble for instance was sparked not by its inflated deficit, but by the downgrading of its government debt by the credit rating agencies. This had no basis in market fundamentals. However, it caused the cost to Greece of servicing its debt to spiral out of control. Thus forcing Greece to go cap in hand to the EU and IMF for a loan guarantee and brutally slash public spending and cut taxes for corporations. 

This condemned millions of Greeks to a lifetime of penury, as public sector cuts act as the quid pro quo for the credit rating agencies bumping Greece’s credit rating back up, thus calming the bond markets and staving off financial ruin. 

Greece’s inflated budget deficit was principally the fault not of the accounting practices of Greek governments but of the incompetence and dangerous practices of the credit rating agencies. Agencies enriched by the very banks they were supposed to be regulating.

The irony for Greece is that the austerity programme that has been forced on it in return for having its credit rating upgraded, makes it even harder for its economy to emerge from recession, let alone grow sufficiently to bring its deficit under control and pay off its debts.

The European Commission has proposed the creation of an independent European Credit Rating Agency which, if established, would counterbalance the influence of the private credit rating agencies, operating with greater transparency and a greater focus on economic sustainability and the fundamentals of the real economy. This would help to create a more stable global financial system, less focussed on short-term profit, and make it easier to conduct public policy in a way that prioritises the interests of ordinary people rather than those of the financial and corporate elite.

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72 Responses to “Rating agencies: The unaccountable oligopoly that can destroy economies”

  1. Mark Stevo

    Sorry, meant to say Stiglitz ISN’T criticising the agencies (at least not in this piece).

  2. scandalousbill

    OK, so when he says:

    “Delegation of effective regulatory responsibility to the rating agencies is partly what got the world into the present mess; and the rating agencies’ judgments have proven to be deeply flawed…”

    He is prasing their efforts and admiring their track record?

  3. Mark Stevo

    No. I said he wasn’t criticising, not that he was praising. I’m not sure what in my post could have led you to that conclusion. This article isn’t about agencies, it’s about the EU and it’s perceived lack of support.

  4. scandalousbill

    Oh. So when I say that your judgement is deeply flawed, that would not be a criticism?

  5. Mark Stevo

    Sorry, I see your point. I don’t think anyone can deny they catastrophically underestimated risk historically. I don’t however, accept that they are overestimating the risks around sovereign debt impairment. There’s simply nothing in this piece to suggest that the agencies where wrong to downgrade Greece. Again, this is an article predominantly criticising the EU for not standing behind Greek debt and it’s hard in my view (and haven’t seen anything to the contrary either in the Guardian article or in this thread of comments) to see how, without EH support, Greek debt can be viewed to be on a similar risk profile as Germany.

  6. scandalousbill

    Mark Stevo,

    The debt to GDP ratio has been pretty well a standard measure for the ability of nations to cover/repay sovereign debt. Yet Pre-earthquake Japan has consistently had a higher debt/GDP ratio than the restated Greek figures even if they are applied postadated to undo the Greek government/Goldman Sachs cover-up, or in your previous example, back to 2001. It is abundantly clear that such a distinction figures nowhere in any of the ratings provided by the agencies in any given year. The downgrading of Greece seems to be based on factors other than the objective economics to which you allude.

  7. NoBigGovDuh

    RT @leftfootfwd: Rating agencies: The unaccountable oligopoly that can destroy economies http://bit.ly/dIf5t0

  8. Mark Stevo

    I think the agencies have been considerate of debt / GDP ratios in the past (not least when they downgraded Japan in January). Nevertheless if would seem foolish to take debt /GDP on a standalone basis without considering ability to fund ad it’s reasonably clear to investors that there’s been a ready willingness if domestic investors willing to buy Japanese bonds and that hasn’t been the case for Greece. I’m not sure focusing on a single metric is going to be at all helpful.

  9. scandalousbill

    No one is arguing for a single metric based analysis, the description was used to highlight the discrepancies within the rating agencies outlook. The case of Japan indicates a consistently high level of debt with minor adjustments over the history the Japanese production post lost decade. This contrast very sharply with the ratings for Greece, the PIIGS as well, not to mention the recent posturing by the Tory coalition and the spectre of horror based upon their misguided credit card analogies. There does seem to me, at least, to be a definite ideological bent to the activities of the ratings agencies, and this has had an adverse impact of the nations concerned.

    Mark Anderson has made a valid point, reform is needed in this respect.

  10. Mark Stevo

    There clearly is a discrepancy between the agencies outlook for Greece vs Japan, but why shouldn’t there been when the depth of capital willing to buy Japanese government debt is so much deeper? Why focus on the debt / GDP number and ignore the greater pool of capital ready to refi Japanese government bonds?

  11. scandalousbill

    “Why focus on the debt / GDP number and ignore the greater pool of capital ready to refi Japanese government bonds?”

    My understanding is that Japanese investors have over the years predominantly preferred foreign bonds, particularly US, so the domestic capital appetite was not the key factor. In fact, given the recent disaster, there is considerable concern that Japanese repatriation of Capital can have a negative impact on US and European bonds.

  12. Mark Stevo

    No. Japan has a much deeper base of domestic investors in government bonds reflecting a prolonged period of a high savings ratio (including domestic individuals, banks and insurers). An inflow of capital into Japan does indeed seem likely, but reflects a combination of insurance claims (both foreign and domestic insurers who have deployed assets abroad) and universes rebuilding spend. You’re right that it’ll likely impact on US and European credit spreads.

  13. Mark Stevo

    Oh FFS, my iPhone related spelling woes get worse and worse. Hope that made sense…

  14. graham hart

    Debt is an obsolete concept in our modern world.
    The nations should agree to stop financing investment using debt and print the money instead.
    Our infrastructure is decaying while we have capable people on the unemployment scrap heap all because we worship money.

  15. Mark Farmer

    Can someone explain the Economic logic of credit rating an International Government. Obiously the concept is a prudent one when it comes to individual businesses, especially in the here today, gone bankrupt tommorrow business culture that were moving towards and i completely agree with the principles that businesses have a choice of lending providers they can shop around for the best deals. But this same principle doesnt apply to a state…. Its always going to be there in some shape or form. Even if a state goes bankrupt they again need to borrow money to get them selfs out of the orginal debt, usually from the IMF, thus suggesting that they are borrowing from the IMF to pay former creditors…. hence all repayments from a Government must be close to 100% guarenteed to be repaid. Taking this into consideration along side the known positive economic impact financial stimulus has on the overall economy and the fact most western countries operate a fiat currency system that means the currency is no longer tied to gold or commodoties that have to be stored in the bank as collatoral. Sounds like a pretty logical step to start providing relatively high volumes of low interest debt to National Governments. This being the odvious outcome of a Public European Ratings Agency. My only concern is that the money should be reseved for capital expenditure on long term infrustructe projects.Such as creating sustainainble and self sufficient energy,transport and communication infrustructure that forms the back bone of every country.

  16. Shamik Das

    Gd Q frm Frank Dobson on why we invest so much importance in the credit rating agencies – See http://t.co/reF9MhMm for more on the subject

  17. Ian

    Gd Q frm Frank Dobson on why we invest so much importance in the credit rating agencies – See http://t.co/reF9MhMm for more on the subject

  18. -

    Gd Q frm Frank Dobson on why we invest so much importance in the credit rating agencies – See http://t.co/reF9MhMm for more on the subject

  19. Lucy Proctor

    Gd Q frm Frank Dobson on why we invest so much importance in the credit rating agencies – See http://t.co/reF9MhMm for more on the subject

  20. Marcus A. Roberts

    Gd Q frm Frank Dobson on why we invest so much importance in the credit rating agencies – See http://t.co/reF9MhMm for more on the subject

  21. The Dragon Fairy

    Gd Q frm Frank Dobson on why we invest so much importance in the credit rating agencies – See http://t.co/reF9MhMm for more on the subject

  22. If the right cares about sovereignty, why the silence on credit agencies? | Left Foot Forward

    […] already know the power that ratings agencies have. We covered it in March this year: Governments that aren’t being seen to shrink the state and cut taxes for […]

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