Alex Hern reports on the calls from the Party of European Socialists to regulate the credit ratings agencies, and considers what the problems with such regulation may be.
The Party of European Socialists, the European political party which Labour is a member of, has hit out at the power of credit ratings agencies following S&P’s decision to downgrade nine Eurozone states on Friday.
The President of PES, Sergei Stanishev, of the Bulgarian Socialist Party, said:
A dozen anonymous analysists with no shred of legitimacy and a proven track record of gross inefficiency, effectively decided on Friday to make life much harder for millions of Europeans. This agency, like the others, is acting subjectively, politically and irresponsibly. This is an international scam that has to stop.
Commenting on proposals for regulation of the agencies, Stanishev continued:
Either we accept the domination of CRAs and we continue to weaken our societies, or we rebuild democratic standards in our society.
We can ban the rating of states: banks are more than adequately equipped to do their own assessment of risk. We can force CRAs to be held accountable and to act in a transparent and predictable way. We can rate CRAs and link their assessment to their past performances.
Most importantly, we can create a European Independent Credit Rating Agency, which would be the only one allowed to provide rating for regulatory purposes.
Writing on Left Foot Forward in advance of S&P’s downgrades, Ben Fox argued:
While S & P’s threat is certainly a massive over-reaction it is scarcely surprising. It fits into the pattern of behaviour by the rating agencies – too generous in the boom years, swinging to being far too severe in the hard times.
The main problem has been that credit ratings have increasingly tended to become a self-fulfilling prophecy rather than a sensible assessment of creditworthiness.
Downgrading the credit rating of Greece, Irish and Portugal to junk status made it much harder for those countries to service their debts and made bailouts inevitable. If Spain, Italy or, indeed, any country were to suffer a downgrade it would push them into further difficulty.
The problem the EU has is that regulation of CRAs is, at heart, a free speech issue. While it is true that they have huge power, disproportionate to both their record and their accountability, so too do other organisations – to pick just one example, News International.
If Stanishev can navigate this issue successfully, the threat to democratic governance from the CRAs could be reduced. But, just as with dealing with our dodgy press, the desire to come down hard with regulation and censorship may be counterproductive.
See also:
• Politics vs Economics: setting the scene for the Fabian’s Next Economy conference – Marcus Roberts, January 13th 2012
• Eurozone crisis: A threat or a promise from the credit rating agencies? – Ben Fox, December 6th 2011
• If the right cares about sovereignty, why the silence on credit agencies? – Alex Hern, November 22nd 2011
• The current crisis: brought to you politician by inaction and unaccountable credit rating agencies – George Irvin, August 8th 2011
• Rating agencies: The unaccountable oligopoly that can destroy economies – Mark Anderson, March 11th 2011
32 Responses to “European socialists call for regulation of the ratings agencies”
Sam
It beats me how they will ban the rating agencies from doing anything. The three main agencies are based in the US, the Constitution will protect their right to free speech. Any ratings they publish will be over the internet in 5secs (even if europeans are forbidden to know them officially!). The markets will pay heed to the ratings if it serves their purpose, otherwise not. This cry from the heart is really Canute telling the waves to retreat.
Anonymous
+++MEMO FROM EUROPEAN UNION CREDIT RATING AGENCY+++
Greece has a AAA Credit Rating
Greece has always had a AAA Credit Rating
+++MEMO ENDS+++
Anonymous
Quite.
So when times were good, and they gave AAA ratings to junk countries, are you going to insist that the lenders get extra interest payments from the likes of Greece?
Thought not.
I know. Lets shoot the messenger.
Remember too about the UK’s AAA rating. That rating is just about the bond holders getting a default over the next 10 years.
It says nothing about the pensioners getting a default, partial or full, on their pensions. It’s just another debt that the government owes.
Remember, if the pensions aren’t on the books, then the plan is not to pay them.
It’s a Ponzi.
Anonymous
Mind you, it does have some legs.
I think I’ll ask Labour to set me up as the only ratings agency. Nice bit of regulation stops all the competitors.
Then a few back handers, and governments can have the credit rating they want. After all, you’re worth it.
Awake!
Fitch is majority owned by a french company- wonder if they will downgrade french debt?
So hardcore leftie IN EUROPE calls for a US company to not be allowed to sell research to another company in the US.
Why would left foot forward print that, it makes the left look stupid??