Friday, 9 March 2012

Time To Downgrade The Credit Ratings Agencies

"The three credit ratings agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly...This crisis could not have happened without the ratings agencies. Their ratings helped the market soar and their downgrades through 2007 and 2008 wreaked havoc across markets and firms."

The damning verdict by America's Financial Crisis Inquiry Commission (see page xxv) which, in January 2011, laid significant blame at the doors of the main credit agencies, for the credit crunch and subsequent global economic downturn of 2008.

Conclusions don't get any less ambiguous.

And yet, and yet, the chancellor still woos them, still panders to them, warning the country that last month's 'negative' outlook for Britain's triple A rating was merely 'a reality check' that must be heeded.

Whilst other countries' triple As become doubles, and triple Bs disappear into the world of the derisory "junk" status, as far as George Osborne is concerned, our own rating serves to vindicate the government's austerity project.

But, very soon, the chancellor may well find himself as the only person believing the agencies' hype.

The effects of Standard & Poor's (S&P) US downgrade last year had a negligible effect on the market's confidence in the US, and in fact led to them buying up Treasury bonds and pushing down long term interest rates. Thereby echoing similar such behaviour in the past after other so-called 'safe' investment countries (Japan and Canada) had seen their credit ratings fall.

As one leading economics commentator points out, Japan has had its credit rating downgraded several times over the last couple of decades. The result?

"Japan is now paying the lowest long-term interest rates in recorded economic history."

Better just to ignore the credit agencies, he argues.

Timothy Geithner, US Treasury Secretary, lambasted S&P for having shown "really terrible judgment and [having] handled themselves very poorly. They've shown a stunning lack of knowledge about basic US fiscal maths."

The fact that just before the downgrade they had miscalculated US debt by about $2tn gave some credence to Geithner's anger.

When France lost its S&P triple A rating, President Sarkozy reacted with disdain, calling it a non-event and saying it "changes nothing." The European Central Bank's president, Mario Draghi, has questioned the importance of the credit agencies, believing them to be a distraction. "We should learn to do without [them]," he's said.

This week, the "Big Three," (S&P, Moody's and Fitch), who collectively rate about 95% of debt, were hauled before the Treasury's Select Committee, which is conducting an inquiry into their "accountability, transparency, and methodology."

All of which are finally coming under increased scrutiny:

"When they were minor players, it wasn't a big issue, but now unelected executives with, at best, a spotty track record are shaping the future of nations, sailing through storms which they helped to create on the way to ever greater profits."

In written evidence submitted to the Committee, The Co-operative Party, which is campaigning for reforms to financial services, drew attention to the agencies' conflict of interest:

"...the largest source of income for the rating agencies are the fees paid by the very companies that the rating agencies are supposed to impartially rate."

They went on to point out that:

"Despite the fact that inaccurate credit ratings were a primary cause of the crisis, agencies remain largely unaccountable to either investors or regulators. Part of the reason for this is their assertion that they merely provide opinions and as such are protected by free speech provisions. Yet major market participants are continuously encouraged and sometimes even obligated to utilise rating agencies."

The backlash has begun.

An edited version of this article was first published by Liberal Conspiracy on Tuesday 13 March 2012

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