The Case Against Ratings Agencies

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For months now we have been reading and hearing European political leaders decry the manner in which the perfidious ratings agencies (Standard & Poor’s, Moody’s and Fitch) have continued to downgrade the ailing Eurozone economies. On the 13th of July, last,   the German Finance Minister Wolfgang Schaeuble expressed his bewilderment and inability to “decipher” the downgrading of Portugal. He also argued that there was a “need to break the oligopoly of ratings agencies.”

European Commission president Jose Manuel Barroso was also quick to jump into the fray, criticising Moody’s for downgrading Portugal so soon after it had received a bailout, arguing that their action had only served to fuel speculation in the financial markets. Like Shaeuble he evoked his concern about the ratings agencies, focusing on their geographic concentration.

“It seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe.”

However, while this is clearly a valid point – not only for Europe but also Asia, Africa and other regions – the real problem with the ratings agencies lies deeper. Merely spreading them across the globe will not eradicate their underlying and deep defects. As Michael Hudson eloquently argues in a recent piece in Counterpunch:

In today’s looming confrontation the ratings agencies are playing the political role of “enforcer” as the gatekeepers to credit, to put pressure on Iceland, Greece and even the United States to pursue creditor-oriented policies that lead inevitably to financial crises. These crises in turn force debtor governments to sell off their assets under distress conditions. In pursuing this guard-dog service to the world’s bankers, the ratings agencies are escalating a political strategy they have long been refined over a generation in the corrupt arena of local U.S. politics…

Masquerading as objective think tanks and research organizations, the ratings agencies act as lobbyists for banks and underwriters by endorsing a race to the bottom – into debt, privatization sell-offs and an erosion of consumer rights and control over fraud. “S&P was aggressively killing mortgage servicing regulation and rules to prevent fraudulent or predatory mortgage lending,” Stoller concludes. “Naomi Klein wrote about S&P and Moody’s being used by Canadian bankers in the early 1990s to threaten a downgrade of that country unless unemployment insurance and health care were slashed…

No less a financial publication than the Wall Street Journal has come to the conclusion that “in a perfect world, S&P wouldn’t exist. And neither would its rivals Moody’s Investors Service and Fitch Ratings Ltd. At least not in their current roles as global judges and juries of corporate and government bonds.” As its financial editor Francesco Guerrera wrote quite eloquently in the aftermath of S&P’s bold threat to downgrade the U.S. Treasury’s credit rating: “The historic decision taken by S&P on Aug. 5 is the culmination of 75 years of policy mistakes that ended up delegating a key regulatory function to three for-profit entities.”

The complete article by Michael Hudson is available on Counterpunch.

Photo is of Stephen Joynt, of Fitch, left; with Raymond McDaniel, center, of Moody’s; and Deven Sharma, of S.& P., being sworn in at a House Congressional Hearing in October 2008.