This post is also available in: French
A couple of years ago I published an Article in Pressenza about Credit Rating Agencies (CRAs). In the week that Standard and Poor decided to downgrade France it is worth repeating what was said then, because nothing has changed (for the better, at least).
At that time the target was the US but given that the three major CRAs are American it is important to note that they have been much more draconian with European countries, a cursory analysis of the agencies interests clearly show why.
First published in August 2011: “Credit Rating Agencies are at it again. If the hole in the real economy, the one in which real people live, created by the virtual economy, where the speculators live, aka “rescuing the Banks during the subprime crisis”, were not big enough, Standard and Poor, has “downgraded” the US Credit Rating sending the world economy into a deeper hole. So who are they?
Paul Krugman, The New York Times columnist and Nobel Prize for Economics (October 14, 2008) tells us: “…it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really? Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point — then went ahead with the downgrade.” krugman.blogs.nytimes.com/
Instead of talking about the “markets” and their inalienable rights to do whatever they want in pursuit of a few dollars more its would really be more useful if the Media started to inform more about how the economic system really works and about whose interests it really serves and about those who, unseen, pull all the strings. Let’s have some information and transparency about what really matters. Then we will be able to see clear relationships emerging between poverty, famine, deprivation, social inequality, healthcare (lack of), education (lack of), and neo-liberal economics, the free market et al.
At a time when London and other UK cities are ablaze with gangs of youths firebombing and looting shops we could ask ourselves why nobody makes the connection between this type of looting and the example of looting that the Banks brought to bear on the World Economy – we know it has been business as usual, bonuses, etc. – just as very few people connected the bullying in the schools with the example of bullying by powerful nations on weaker ones (Iraq, Afghanistan, Libya, etc).
Not being an economist myself I consulted Wikipedia to try and understand this new onslaught on the economy by seemingly infallible agencies: en.wikipedia.org/wiki/Credit_rating_agency
“A Credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings.
In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer takes into consideration the issuer’s credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued.
The value of such security ratings has been widely questioned after the 2007-09 financial crisis. In 2003 the U.S. Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest. More recently, ratings downgrades during the European sovereign debt crisis of 2010-11 have drawn criticism from the EU and individual countries.”
“… Credit rating agencies do not downgrade companies promptly enough. For example, Enron’s rating remained at investment grade four days before the company went bankrupt, despite fact that credit rating agencies had been aware of the company’s problems for months. Or, for example, Moody’s gave Freddie Mac preferred stock the top rating until Warren Buffett talked about Freddie on CNBC and on the next day Moody’s downgraded Freddie to one tick above junk bonds.
… Large corporate rating agencies have been criticized for having too familiar a relationship with company management, possibly opening themselves to undue influence or the vulnerability of being misled. These agencies meet frequently in person with the management of many companies, and advise on actions the company should take to maintain a certain rating. …While often accused of being too close to company management of their existing clients, CRAs have also been accused of engaging in heavy-handed “blackmail” tactics in order to solicit business from new clients, and lowering ratings for those firms.
…Credit Rating Agencies have made errors of judgment in rating structured products, particularly in assigning AAA ratings to structured debt, which in a large number of cases has subsequently been downgraded or defaulted.
… According to professor Frank Partnoy, the regulation of CRAs by the Securities and Exchange Commission (SEC) and the FED has eliminated competition between CRAs and practically forced market participants to use the services of the three big agencies, Standard and Poor’s, Moody’s and Fitch.
SEC Commissioner Kathleen Casey has said that these CRAs have acted much like Fannie Mae, Freddie Mac and other companies that dominate the market because of government actions. When the CRAs gave ratings that were “catastrophically misleading the large rating agencies enjoyed their most profitable years ever during the past decade.”
Argentina – the dress rehearsal.
The sequence of events that led to the 2001 collapse of the Argentinean economy started well before July 11, when three Credit Rating Agencies slashed Argentina’s CRs. However many analysts saw this as the final trigger that forced the government to apply key austerity measures, slashing state salaries and some pensions by up to 13%. Foreign investors, more familiar with the Credit Rating effects, withdrew their money. A bank run ensued, the banks closed and many people lost their savings; the IMF announced it would not release further aid to Argentina because the austerity measures were not tough enough. This meant shrinking the State to a minimum, abandoning health, education, housing and other vital services to the profiteering private sector.
In retrospect this in fact looks now like a dress rehearsal for bigger and better things to come.
It appears that the almighty CRAs, these modern day Delphic Oracles, are firmly at the service of an economic model that is already showing its failure, its dehumanisation and its unpredictability. They have no fear of submerging the world into recession because that is exactly the point where Big Capital effects its concentration. Sell, sell, sell, for the small investors and businesses that thought they were making it during the boom. Buy, buy, buy for the large financial institutions that have been accumulating capital just for this moment.
And for ordinary people? Cuts, cuts, cuts.”