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
Mark Stevo,
If you consider the size of the institutions involved, the intermix is virtually unavoidable. It is simply a diversification of portfolio, where Peter pays Paul.
Mark Stevo
I don’t have the evidence to say one way or the other whether banks are fully hedged on sovereign debt (although I’d suggest that the outcome of the recent “stress tests” makes it pretty clear that they’re not). That being said, you’re still not addressing the point that even if they are, someone, somewhere, is exposed to sovereign default risk by being in the other end of a CDS trade and their pricing of risk will be driving yields. You can’t make the risk disappear.
I still don’t follow how securitisation relates to this debate.
scandalousbill
Mark Stevo,
Perhaps the differences emerge from viewing events from a holistic approach or as self contained phenomenon. While an analyst may view things from a sector specific perspective for greater clarity of understanding, this perspective may not necessarily reflect global corporate policy or practice.
If I could draw your attention to the massive US bailout of the banks that occurred during the early years of the Obama administration, the banks predominantly spent the bailout funds ion the purchase of Chinese currencies. To me this was a massive hedge. The gains from a harder currency vis a vis the falling dollar were written back against losses in other sectors of the institutions’ business. While this activity did little to bolster the US economy, or the poor mortgage holder, it did favourably impact the bottom lines of the banks overall performance and profitability, and played no small part in reinstating the bonus culture.
My position is that such overlaps are commonplace within financial institutions. While one can view global financial transaction as the interplay between independent institutions, or even between nation states, I feel that much insight can also be derived from viewing Global financial activity from the perspective of the vertical integration of large financial institutions is this case.
Mark Stevo
The discussion so far has related, I think, to whether the agencies are responsible for a higher yield on government debt than would otherwise have been expected. To argue that credit analysts in banks should buy government bonds at lower yields because, in any event, the government will bail them out, seems nonsensical. The banks got into trouble, in part, by mispricing risk and having them do it again won’t help.
Needless to say of course, it’s not just “too big to fail” banks buying these instruments, pension funds are doing the same. Are you advocating the world financial system provides then the same bailout and that there should be a collective guarantee of every nation states debt by every other nation state?
Out of interest, will you be snapping up these bonds if they’re so attractive?
scandalousbill
With todays rate of inflation, not likely.