What to do about the credit ratings agencies

This is a better than usual piece in The Guardian about the credit ratings agencies. Better as it actually has facts in it for example. But they do quote a really stupid idea:

But in many other areas of the financial system, the agencies still wield tremendous power – power that many believe needs more regulation. \”The obvious solution would be to take this public service into public hands,\” Aditya Chakrabortty has argued in these pages. \”Let\’s have a ratings agency run by the UN, funded by pooled contributions from both lenders and borrowers … Let\’s make the ratings business a utility, rather than a semi-cartel that intimidates elected politicians and rakes in excess profits. It\’s time to break up the bullying double-act.\”

The reason this is stupid is that we don\’t in fact want the politicians telling us what the politicians are doing with our money. We\’d like some non-politicians to tell us what the politicians are doing.

Now of course, there are those who believe that the State can do no worng. But I would point you to the example of Argentina.

They have a number of bond issues where the interest payable is linked to the inflation rate. There is considerable suspicion that the official statistics agency is grossly under-reporting the inflation rate. From memory, saying that it\’s 10% ish when independents think it more like 25%.

And the Argentine Government is attempting to jail those independent economists for pointing this out.

No, I think we\’d really rather like to stay with a system where that free speech thing still applies, don\’t you?

24 comments on “What to do about the credit ratings agencies

  1. A ratings agency run by the UN???

    All would win and all would get prizes. Except for Israel of course whose bonds would all be junk.

    The very fact that this discussion is taking place today, shows that this is all about politicians not wanting to be held to account for their spendthrift ways.

    Are they planning to ban private agencies / individuals from commenting on the creditworthiness of countries? If not how would it work, if they are how do we define what is acceptable?

    Financial newspaper columnist writes that the stock of debt of Spendthiftistan is too high and that
    a) investors should take care
    b) risks are higher than in The Republic of Prudence
    c) Under the old system it would not have been regarded as investment grade

    Where is the cut off point?

  2. His faith in the body politic would be touching if it weren’t so totally unrealistic and frightening for anyone with a modicum of responsibility

  3. Serf

    Certain Eurocrats and European leaders have indeed suggested that credit rating agences should be banned from commenting on countries that are in “deficit reduction programmes”. This is I think to prevent CRAs from highlighting the fact that EU deficit reduction programmes actually make sovereign debt riskier because they clobber all signs of growth in those countries. I’m not sure exactly how they would achieve this, though. It’s not as if the ECJ has any jurisdiction outside Europe, so the only CRA they could realistically gag would be Fitch.

    As if anyone takes any notice of CRAs anyway. The market response to pronouncements recently has been a very loud yawn. “Priced that in yonks ago, mate…..”. “Downgrade Friday” has become a joke.

  4. The real problem is that even if there were a UN run “ratings agency” given that all that ratings agencies do is issue an opinion on whether a country is likely to pay back its debt pretty much anyone can set up a ratings agency tomorrow in direct competition with said UN agency. Unless of course the world decides to limit free speech to the point where no one can express such an opinion (which you couldn’t in the US due to the constitutional right to free speech).

    So while this is inherently a very dumb idea it is also one which is impossible to implement.

    The real problem with the ratings agencies is that regulators (and the global standard setters such as the Basel committee) are simply lazy. On the advice of regulators governments all over the world have built ratings agency opinions into the regulatory framework. This has granted the big three a global oligopoly on ratings.

    Of course this is convenient for governments with high credit ratings. For example the FSA requires banks to hold a certain amount of highly liquid assets to enable them to have three months liquidity. All sounds very sensible except when you realise that gilts are highly liquid assets and happen to be triple A rated. So just when the UK needs to sell lots of gilts guess what all of its banks need to buy them.

    Ratings agencies would be completely unnecessary if banks actually performed thier own analysis on the credit worthyness of borrowers. But why do that when the government tells you that buying AAA bonds is fine, why don’t you just do that, its cheaper easier and faster.

  5. Kevin Monk, but Fitch is French – i.e. good whereas Moody’s and S&P are evil capitalist anglophones.

    Therefore only Moody’s and S&P are real evil CRAs

  6. The problem is not the nominally private status of the CRAs. It is the creation of “public” debt. Governments simply should not be allowed to borrow money. It’s as simple as that.

    I’ve said this before but, if they want to expand the money supply, let them just print it. They have the power to do so. The only people who would object would be the banks; and since in such a regime the State would not require the approval of said banks then,

    “Oh dear. What a pity. Never mind”.

    Bills, not bonds. It’s extraordinarily simple. Then, screw the Credit Ratings Agencies. That which does not borrow does not need a credit rating. And neither can it ever go bust. Its currency can lose value of course and inflate, but a wise country will publish its rate of printing to demonstrate wise currency management, thus (hopefully) preventing it doing a Zimbabwe/Weimar.

    Nobody actually believes these “debts” are ever going to get paid back. If they were, the money supply would evaporate anyway. So let’s drop the nonsense of “lending” altogether.

    “Bills not bonds”. That is my catchphrase.

  7. I thought there are at least 3 CRAs?….

    There are far more

    http://www.defaultrisk.com/rating_agencies.htm

    The problem is as Offshore Observer notes

    ……The real problem with the ratings agencies is that regulators (and the global standard setters such as the Basel committee) are simply lazy. On the advice of regulators governments all over the world have built ratings agency opinions into the regulatory framework…….

    Take away the regulatory bias towards the big three and see a true market in ratings.

    None of this will solve the problems of our politicians. They want to force Mum & Dad to go on holiday, so that they can invite their friends around, drink Dad’s liquor and make the next door neighbour pregnant, all whilst claiming to be revising for exams.

    They possess the subtlety of a 3 year old who tells his Mum not to look as he empties the contents of her jewellery box under the bed.

  8. Offshore Observer:
    “Ratings agencies would be completely unnecessary if banks actually performed thier own analysis on the credit worthyness of borrowers.”

    But banks & investors do perform their own analysis. That’s why not all AAA bonds have identical yields. And why bond yields barely moved after the recent downgrades.

  9. Offshore Observer:

    You hit the nail on the head – all the ratings agencies do is express an opinion – surely the weight that others grant that opinion is something else.

    Ultimately this is a free speech issue – just like with immigration / racism they simply want to ban opinions they don’t like.

    Fascists bastards in other words…

  10. Of course the EU wants one,
    http://www.europarl.europa.eu/oeil/popups/summary.do?id=1155735&t=d&l=en

    “European Credit Rating Foundation: the Commission is asked to conduct a detailed impact assessment and viability study on the costs, benefits and potential governance structure of a fully independent European Credit Rating Foundation (ECRaF) which would expand its expertise into all three sectors of ratings. The Commission should consider the start-up financing costs to cover the first three to maximum five years of the Foundation’s work. Members are strongly of the opinion that financing costs should under no circumstances be borne by taxpayers and considers that no further funding should be provided and that the new ECRaF should be fully self-sufficient financing its own budget after the start-up period.”

    When did the EU stop funding something that it set up for its own benefit?

  11. ‘Take away the regulatory bias towards the big three and see a true market in ratings.’

    Having more ratings agencies isn’t the solution, because then countries will just go rating shopping. I think in true market, the optimal number of ratings agencies is zero.

  12. Ratings aren’t for countries though, they’re for people looking to buy debt or whatever. So a country couldn’t just go to a rating agency giving them AAA and say, ‘Look, we’re brilliant’, if all the other agencies are giving them double Fs, ahem

  13. Just where do they get these crazy ideas from? Seriously – everyone crapped all over the ratings agencies for not being up to speed when the whole US Mortgage Backed Securities dam burst…now the agencies are more on the ball (not great, but at least better) and they are vilified and must be replaced by the great Socialist Rating Agency of the United Nations.

  14. Yes it’s a free speech issue: it’s opinions, innit?
    But surely the business model of a ratings agency is inherently flawed. I might pay the price of a newspaper to read an opinion (I use ex-editors of the Times: they are always wrong, so I calibrate mine accordingly). But would I pay (say) Tim the price of lunch to hear his, wise as they may be? No thanks.
    Same with ratings agencies. They compete for brainy analysis with much more interesting and lucrative employers, investment banks.
    So they end up competing with regulators for the dregs. No wonder noone takes much notice of them and as Frances says “Downgrade Friday” has become a joke.

  15. Shinsei67 – yes of course that is true, but sweeping generalisations are a much better rhetorical tool. And this is the guardian so fight fire with fire.

    ARand – the issue of MBS is a fair point. But that was ratings agencies dabbling in pretty complex instruments which nobody really understood. If you look at the ratings agencies track record with soverigns and corporates they are actually pretty good at that and have demonstrated expertise for many years.

    I still maintain that the regulatory bias towards ratings agencies is unnecessary.

  16. ….Alas, the countries pay for these ratings, not the investor…..

    As you sure?

    I know companies pay to be rated, but I was under the impression that countries didn’t have to pay.

  17. I’ve said this before but, if they want to expand the money supply, let them just print it. They have the power to do so. The only people who would object would be the banks

    And anyone with savings. All ten of us.

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