Friday, 11 November 2011

Join a Ratings Agency if you want Real Power

This week yet more events have demonstrated that young people who aspire to influence today’s world should join a Ratings Agency.

After completely missing the risks involved in the US sub-prime mortgage market in 2008, these unelected organisations have panicked markets around the world into increasing interest rates for sovereign government debt. 
In July Moody’s put the US on notice that, as a result of a lack of political agreement between Republicans and Democrats over the means to reduce the national debt, its rating risked being downgraded from AAA   In spite of making serious mistakes with the figures that they used, Standard and Poors, in an unprecedented move in August, cut the triple-A rating of long-term U.S. debt.  Treasury officials said that the downgrade was based in part on a $2 trillion error in S and P's calculations and lawmakers lambasted the credit-rating firm.  S and P said that the discrepancy was about a difference in debt assumptions.
Acting Responsibly?
On 25th July 2011 Moody’s downgraded Greek government ratings to Ca, one level above default, and in response the market has forced up interest rates to unaffordable levels. 

Italy, which everyone agrees has a sound real economy, and which has lived with high public debt, but low personal and business debt for many years, had its credit rating downgraded for purely political reasons.  The ratings agencies have forced its Prime Minister to resign because they consider that he was unlikely to be able to deal with reducing the National Debt.  This was an entirely political judgement and it clearly demonstrates that the Ratings Agencies have more political power than elected leaders of national governments.  But with such great power comes the responsibility to convincingly demonstrate both competence and impartiality.

The shameful episode yesterday when S and P sent out a notice falsely saying that they had downgraded France’s rating from AAA by mistake, and corrected themselves a couple of hours later, makes it plain that these agencies now need much tighter supervision than is currently being exercised by the Securities and Exchange Commission. 

More Transparency
When it comes to sovereign debt, how the Agencies exercise their functions, including the names and votes associated with their decision making should be made public and transparent. As should the political backgrounds, financial interests and tax records of their senior managers and directors.  An Agency’s senior managers should also have to declare, under threat of legal pursuit, whether they, or their close relatives, hold offshore accounts, and if so how much is in them.  It would be far too easy at present for unscrupulous organisations or individuals to bribe decision makers to vote to downgrade a country’s rating for private gain or for highly politically motivated individuals to infiltrate these agencies over a period of years.  In fact senior staff should submit themselves to the same degree of scrutiny as a US politician standing for government office.

If the spotlight is not shone into the darker corners of these agencies’ decision making processes and commercial practices, then they risk even more draconian measures than I have suggested above, or have already been suggested in the US and the EU (see below).


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