Chuka is the lad, isn\’t he?
Days after, Greece\’s prime minister, Georgios Papandreou, launched a scathing attack on credit rating agencies, accusing them of ramping up pessimism about his country\’s economy and, in so doing, \”seeking to shape our destiny and determine the future of our children\”. Recent developments in Portugal and Spain have further highlighted the way their judgments can make or break an economy.
An IMF paper published in March showed how agencies\’ ratings have \”significant spillover effects\” that \”could spur financial instability\”. That paper is one of several recent studies showing how their influence, be it through rating sovereign debt or other financial instruments, is not only vast but can often be deeply harmful.
Ratings agencies, very naughty people, because they\’re rating sovereign debt lower than politicians think that sovereign debt should be rated.
The European Union\’s de Larosière group, the US Financial Crisis Inquiry Commission (FCIC), the Bank of England and the international Financial Stability Board have all documented these failings. In particular they point to the problems involved with the \”issuer-pays\” model – where the issuing entity pays for its credit rating, creating an inherent conflict of interest.
And there\’s the problem, it\’s the issuer that pays for the rating, so what we need to do is move to a system where it is the user of the information, the potential bond buyer instead of the issuer, who pays for the rating.
Except, of course, for one little point. Sovereign issuers don\’t pay for ratings. So changing who pays for ratings won\’t change the way that the agencies rate sovereigns.
D\’ye think Chuka actually knows this?