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”
Mark Stevo
So yields on government bonds are too low?
scandalousbill
In relative terms, yes
Mark Stevo
I’m struggling a bit here – you’re criticising investors for asking for too high a yield while at the same time saying you think they’re too expensive as well?
scandalousbill
Not at all, I would not go the bond route because in the context of rising inflation, middle east oil uncertainties and Japanese reconstruction their are better options IMHO for my money.
Mark Anderson
Thanks for the comments. In relation to some of the criticism:
Prior to the collapse of Lehman Brothers, Greece didn’t have an inflated deficit and its economy was growing.
The collapse of Lehman Brothers (which the credit rating agencies helped bring about) precipitated a global private sector slump which caused Greece to go into a recession which inflated its deficit.
The Greek government’s dodgy accounting merely added to what was principally a private sector-induced deficit caused by the banking meltdown of late 2008.
To deal with the deficit while the banks were still rebuilding their balance sheets, Greece needed to support its damaged private sector through public sector stimulus so as to return to growth and pay off its deficit. It should have been, essentially, as straightforward as that.
Instead, the same credit rating agencies who precipitated Greece’s troubles went and cut the rating on the country’s sovereign debt and insisted that Greece’s rating would not be bumped back up unless it started ripping up its public sector. This despite the fact that Greece’s public sector was serving as a financial lifeline to a battered private sector that still wasn’t being lent to by the banks.
The Greek government, faced with dangerously spiralling bond yields, felt it had no option but to comply, and so started cutting public spending in order to get its rating bumped back up.
The spending cuts took money out of the economy and caused further damage to Greece’s private sector, further denting Greek GDP and making it harder to pay off the deficit which the credit rating agencies were supposedly so eager to see tackled.
Greece’s spiralling bond yields were brought about by the panic which the attack on its credit rating induced on the bond markets, not by it having an enlarged deficit per se.
The Greece that emerges from this credit rating agency-mandated public sector bonfire will be less well educated, less meritocratic and less able to create a vibrant private sector.
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.
It’s worth remembering that PwC have estimated that the loss of 500,000 jobs in the UK public sector will have the likely effect of precipitating another 500,000 more job losses in the private sector. Massive public sector spending cuts at a time when the private sector is still weak just isn’t good economics.