Kelvinwright's Blog

postmodern thoughts

Should we downgrade the credit ratings agencies?

An article in Spain’s El Mundo today stated that a ratings agency had downgraded Spain’s two leading banks. Most days, credit ratings agencies downgrade the debt or outlook for countries, companies, and even regions of countries. It seems that every time a ray of sunshine breaks through the stormy economic sky, that a ratings agency comes along, rips away the temporary umbrella we had, and unleashes a new storm.

This morning I asked myself what many of us have no doubt asked numerous times:  who are these agencies who seem to rate everything from countries to companies and even regions? How much power do they (and their ratings) really hold?, and more importantly, do we really need them? According to two articles, one in the BBC and the other in The Guardian (links below) they are some of the most powerful players in world finance. The idea is that the agencies help us by providing an idea about which investments are safest to make, rating the “creditworthiness” of countries, companies, regions etc. In simplest terms, the lower the rating, the higher the risk of the investment.

When S&P downgraded America’s AAA credit rating in August, 2011, Timothy Geithner (US Treasury Secretary) responding by saying: “They’ve shown a stunning lack of knowledge about basic US fiscal maths.” The agencies will respond that they are simply being honest and rating things as they are (in the same way that the foolish husband responds to his wife with a yes when asked if her bum looks big in this dress). The agencies downgrade European debt as Europe itself fails to agree as a whole on the best way to save the Euro, whether it can be saved, or even whether it should be saved. Their ratings may not be so misguided. Although a former German economic minister stated in the Guardian article that: “…sometimes it is hard to dismiss the impression that some American ratings agencies and fund managers are working against the Euro-zone.

Mistrust is not so misplaced though. As The Guardian article states: “More people would trust the agencies if they hadn’t got so much so wrong”. In 2009 Moody’s issued a report titled “Investor fears over Greek government liquidity misplaced.” In the run-up to the start of the global financial crisis, a high proportion of mortgage-based debts were rated AAA, when in fact they were little more than junk.  Add to the problem the questions over impartiality. Many of those who are having their credit ratings assessed are the very people paying the agencies to do so.

Are we fed-up of ratings agencies spreading gloom? Just as they were (in the words of the BBC article) plain, flat-out wrong about securitised mortgages and lots of other toxic debt, could they be wrong again about their current ratings? Should we downgrade the ratings agencies?

Link to full articles:

http://www.bbc.co.uk/news/uk-scotland-14450391

http://www.guardian.co.uk/business/2012/feb/15/credit-ratings-agencies-moodys

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August 10, 2012 - Posted by | Uncategorized | , ,

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