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.

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

  1. Richard

    I suspect 13eastie’s mortage interest rate has more to do with the very low interest rate set by the BoE than his own credit worthiness, as is tha case for hundreds of thousands around the country. He won’t be crowing so loudly when they start going up again. After hubris…

  2. Mark Stevo

    Mark, I’m afraid I can’t agree that Greece’s deficit was sustainable pre-Lehman given that it has run at a deficit every year since 2000. There are clear structural issues that make the accumulated debt unlikely to be repaid and to blame the agencies for highlighting as much is simply shooting the messenger.

  3. Mark Stevo

    “A more rational credit rating agency that had the best interests of ordinary people at heart would not have cut Greece’s credit rating and insisted on spending cuts when Greece’s private sector was not yet in a position to do the leg work and when banks still hadn’t started lending again. The credit rating agencies we currently have simply aren’t up to the job.”

    Is this a joke by the way? If agencies deny the obvious (allegedly in the interests of ordinary people) then investors will ignore them and yields will blow out anyway. You will not fix this problem by trying to hide that it exists (not least because you can’t hide it).

  4. scandalousbill

    Mark Stevo,

    (Here we go again)

    You say:

    “Is this a joke by the way? If agencies deny the obvious (allegedly in the interests of ordinary people) then investors will ignore them and yields will blow out anyway. You will not fix this problem by trying to hide that it exists (not least because you can’t hide it).”

    I would like to know how you would respond to the observations made by Joseph Stigliz at the time.

    http://www.guardian.co.uk/commentisfree/2010/jan/25/principled-europe-not-let-greece-bleed

    “For the ECB to announce that it will not accept Greek bonds as collateral would be counterproductive. For the ECB to delegate judgments about the credit-worthiness of Greek bonds to the rating agencies would be more than just irresponsible; it would be reprehensible. 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 – underrating the risk of mortgage backed securities, but consistently overrating the risk of certain sovereign debts”

    I think that Stigliz’s argument could well support the position Mark Anderson has outlined.

  5. Mark Stevo

    Stiglitz criticising the agencies, he acknowledge the “deep rooted structural problems” of the Greek economy and urges the EU to stand behind the debt. I’m not sure any of that suggests that the agencies (and investors) are wrong in forming the view that without some form of credible EU-wide support there will be an impairment of principal.

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