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.
72 Responses to “Rating agencies: The unaccountable oligopoly that can destroy economies”
scandalousbill
13eastie,
If you read, which I will now concede, may well be a stretch for you, you may understand how absurd your comments are. The market you refer to is far from the monolithic objective entity you allude to. Again, John Lanchester is really a must read for you,
BTW, how many investors lost because of Madoff, Lehman Brothers, GM, Equitable Life, Marconi, etc. etc..?.
william
Price is the point where supply meets demand for dog food and lending, and everything else in life.Dog food is a stable business.Sovereign debt is subject to the whims of politicians, hence rating agencies.They do get it wrong.I recommend granting BP December 2012 560 puts for which you will get a cash premium of 125p, against a market price of 460p. 560-125=435.Risk, oil prices halve.Maybe…, ask a rating agency set up by the European Commission , who apparently are omniscient
scandalousbill
Mark Stevo,
You say:
“I don’t think the agencies are suggesting 100% loss of principal, but there’s clearly a risk that the government debt is unsustainable and some form of restructuring sees bondholders take a bath. it’s simple not true to suggest that there’s zero risk of default.”
Fundamental questions arise.
1. Do banks and other financial institutions hedge risk? would say yes.
2. Does securitization tend to magnify risk. Again, I would say yes.
Not to belabour a point, but referring back to Lanchester, his point on Credit Default Swapping, (CDS), outlines a practice used that while not necessarily implying a zero risk strategy, (although I would say in the short term, pretty damn close,),clearly outlines a hefty and effective mitigation tool used by financial institutions as an “insurance” against principal loss.
Mark Stevo
Banks hedge risk, they don’t eliminate if (you can’t earn a 15% roe at zero risk). You’ll have to explain to me how securitisation relates to the current conversation around government bonds.
Mark Stevo
By which I mean the buyers of CDS are not always the buyers of government bonds, and there’ll be someone on the other end of the CDS trade who’ll also be pricing risk. A CDS doesn’t make the risk disappear, it just transfers it to someone else.