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”
H. O.
RT @leftfootfwd: European socialists call for regulation of the ratings agencies http://t.co/hPOvEEfp
Blarg1987
If we look that after the financial crisis, the cost of things such as energy and food futures skyrocketed on the markets as investors pulled their money out of property and needed something secure to invest their money.
The other example wis when the war started in Libya fuel prices went up over 10%, considering it produces only 5% of the worlds oil supply what else could have caused the increase unless people were betting on the future price of oil going up.
Your analagy of the football teams I understand but what has happened in the markets is that someone needs to make money for their investor, they see a country is ok but see they can make money out of it so they start a rumour its rating is going to fall and so bet aginst it, people start to question why people are betting against it and hear the rumour and so they do the same thing, lenders hear and see this and think something dodgy must be going on so increase the level of interest they charge and so causes the problem.
Granted it is partially down to citizens being unable to pay that has caused poverty but you can not say that someone who decides to borrow shares in a company then drives down the share price to buy them at a cheaper price is not responsible either.
Nick Leaton
Libya. If you take the supply out from Libya and other countries affected by the Arab spring, that cuts supply. Demand doesn’t change. So up goes the price. The other producers (not speculators), just up the price. People like Chavaz. The problem isn’t ‘Libya’, its that the arab spring will spread.
There are no rumours. Greece is bust. It’s not fiction. So people want to hedge their risks, so they buy something that profits if it falls. To do that, they need someone who thinks the opposite. You want to make your case by drawing the boundary around the hedger, ignoring their other positions, ignoring the people that think otherwise and buy the country.
So if we take the shorting in shares example. What’s the responsibility of the person lending the shares, hoping to profit when the price goes up? After all you can’t have one without the other. You mistake is to try and exclude the other party from your case. You can’t. You need two to tango, and they form a system. That system is a zero sum game. One wins, one loses.
Nick Leaton
The problem with governments is that they have done what Bernie Maddoff did.
If you don’t report your debts, you can use new cashflows to pay off your debts, until the cash flows in aren’t sufficient. ie. Run a Ponzi.
Greece did do Enron style accounting, using Swaps to transform their deficit pushing it down.
Blarg1987
I did mean both sides of the system are as bad as each other, yes we know Greece is bust, as earlier posted but I meant other economies which are fairly secure are being attacked and would be interesting to note how much is based on speculation.
I only mention Libya as yes the arab springhad already started but it had not affected trhe overall supply of oil, only when Libya reduce its supply did prices really skyrocket.
The other interesting example was the sale of Volkswagon where people betted against the companies share price but in that case got badly burnt bear in mind this was at the time when people were speculating car sales would collapse and so fed on it, that is part of the problem with the economy at the moment, people ae betting negatively which in some very rare cases get burnt but usually could have a knock on affect as lower share prices mean less investment which feeds through to jobs and growth.