A discussion on the importance of the European Commision setting up an independent European credit rating agency
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”
Joel Heason
RT @kieronam: Good (if slightly dense) article on the evil oligopoly of Credit Rating Agencies http://t.co/mrGX2j6
Mark Stevo
I’m afraid you’re living in a fairytale if you think that hiding credit views from investors will somehow make them more willing to continue financing unsustainable government deficits at attractive rates. Stopping Moody’s publishing ratings won’t stop investors coming to the view that, for example, Greece continues to face considerable difficulties with revenue collection. Governments shouldn’t expect to borrow money from investors and then deny them access to informed views.
If another agency is created (and it’s not clear why a new agency funded by issuers should be any more independent than an existing issuer funded agency) then investors will only pay attention if it provides information of value.
13eastie
@6
The reason loansharks exist is because other lenders smell a rat with their customers. Were this not to be the case, loansharks would be unable to compete. Once again, this is the reason the Labour Party has to pay ten times as much interest as I must (unless it has taken to giving its members cash away to its millionnaire chums).
What you call “kindergarten logic” and “naive” is simply the recognition of the facts that, money, when lent, and no matter in what quantity, still belongs to real people (this is the truth that socialists always think they can ignore), and that that person is entitled to be confident of getting it back. It makes no difference whether they are buying premium bonds or gilts.
The left continues to be unwilling to accept that the disastrous state of our public finances is the fault of anyone but the “banks” and the “credit crunch”.
But what is even more perverse is to follow this up by trying to construct an argument that my mother’s pension company should then “invest” her money by offering no-questions-asked credit willy-nilly to bankrupt governments overseas.
Why is it so EVIL of banks to lend money to people who apply for sub-prime mortgages (they are only trying to make a better life for their families), but so NECESSARY that they give cheap loans to governments desperate both to buy votes domestically and to prop up the concept of the utopian super-state on which they’ve staked their reputations?
The paradoxical argument continues…
Mark believes that their is no problem with PIGS public finances. You claim that the ratings agencies would not “bite the hand that feeds them”.
If you are both correct, why are S&P etc. steering their clients away from easy pickings in PIGS? Surely this would be (for want of a better expression) to bite the hand that feeds them? Surely you don’t think this would actually please the institutional investors that pay for such advice?
Mark Stevo
Worth bearing in mind of course that issuers, including the PIGS government, pay S&P for their ratings.
scandalousbill
13eastie,
If Pollyanna was bellicose and belligerent individual, this would probably be your ideal name change.
You say:
“What you call “kindergarten logic” and “naive” is simply the recognition of the facts that, money, when lent, and no matter in what quantity, still belongs to real people (this is the truth that socialists always think they can ignore), and that that person is entitled to be confident of getting it back. It makes no difference whether they are buying premium bonds or gilts.”
I honestly do not know where to start with such nonsense. I might recommend you read John Lanchesters’s book “Whoops”. It is a very understandable straightforward description of Global finance and the underlying causes leading up to the collapse of 2008. The cash on the barrelhead notion implied by your statement simply does not and has not applied to global financial transactions in modern times, if it ever did. The chapter entitled, “The Cashpoint Moment” should be particularly informative for you.
You also state:
“The left continues to be unwilling to accept that the disastrous state of our public finances is the fault of anyone but the “banks” and the “credit crunch”.
But what is even more perverse is to follow this up by trying to construct an argument that my mother’s pension company should then “invest” her money by offering no-questions-asked credit willy-nilly to bankrupt governments overseas.”
The point to note is that unlike equities, where common share investors can loose virtually all of their holdings, government finance, particularly in regards to western industrialized economies, do not carry the same risk. Institutional credit downgrading, or increased lender risk, has simply meant an increased in the premium charged by the lender, not a risk to the lender’s capital via defaulted loan. Government revenues generated primarily from taxation, whose levels as indicated by GDP, whether to the PIIGS, the US or post earthquake Japan are simply not items that are subject to foreclosure. While government payment defaults may be close to occurring in some emerging nations. E.g. Haiti, maybe Zimbabwe, etc, and have occurred in the past to poorer nations, (based primarily on high interest charged) it did not happen in the Western economies during or post the 1930s depression and has a remote chance of inflicting the current industrialized world.