Tuesday, 6 December 2011

Are Credit Rating Agencies Working Against Europe?

With their change of methodology Standard and Poor’s are now firmly in the political arena.  They appear to want to influence political decisions.  By putting on notice of a possible credit rating downgrade fifteen European countries at the very same time as France and Germany were meeting to discuss proposals to strengthen the financial governance of the EU, how else can anyone interpret their actions.

Instead of considering financial fundamentals they now base their assessments of the credit-worthiness of sovereign states primarily on political factors.  They claim to be able to assess the degree of political will of a continent to resolve its debt problems when they were incapable of assessing the fundamental risks of financial products associated with the 2008 sub-prime mortgage crisis!

One of the countries under threat of a downgrade is Luxembourg which has virtually no debt and no political crisis, another is Germany.  If this had no real effect then it would be laughable but, unfortunately, the credit rating agencies influence the interest rates at which countries can borrow money, and the more they have to pay, the less there is available to pay back debt and finance public services.
A decade long recession
I have been thinking for a while that we are looking at a ten year period of no growth in Europe and this week on France Inter Valerie Pecresse, the French minister for the budget, said so as well.  By destroying market confidence, each downgrade by the ratings agencies takes us one step closer to making a decade long recession a reality.  
It’s impossible to see how the US can escape being sucked into the same economic situation, they certainly can’t spend their way out of it and carry on printing more and more money.  But which country has the largest debt, and so far seems incapable of agreeing how to reduce it, the United States?  And where are the credit rating agencies located?  In the United States! 
So whilst the rating's agencies are focussing on Europe and distracting attention from the weak US response to their own debt crisis, the US also has an interest in reining in these unelected organisations, which seem to want to play politics with national governments in the big league. 
I am waiting for the first investigative journalist to publish a story linking the directors of the ratings agencies to unexpected political and financial interests.   Don’t be surprised if you start seeing stories about the clandestine affiliations of ratings agency bosses appearing on both sides of the Atlantic!  
As well as dealing with tighter regulation now being proposed in the EU, the agency's bosses should expect to be scrutinised very closely from now on.  


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