Those poor, moody credit rating agency standards

By Johan Galtung

What are the three credit rating agencies, Standard & Poor’s, Moody’s, and Fitch – 95 percent of the rating “industry” – about? Not very transparent, yet “Standard & Poor’s: silent but deadly” (El País, 16 Jan 2012), stimulates some reflections.

The agencies are US, which goes well with the tendency of the USA to sit in judgment of other countries. It also goes well with something more dangerous: the tendency of other countries to take that judgment seriously. The new prime minister of Spain said he needed no lecturing (from the agencies) on the Spanish economy; but the downgrading shook Spain. Why does Europe not have its own agencies, rating all 50 US states, for instance, like US agencies rate EU members? An internationalization exists; that is what the IMF is all about, advising the World Bank what to do and what not. But their thinking comes out of the same basic mold, neo-liberal.

Second, these agencies are for profit; they make money doing the rating. Clients approach them, ask for a rating, and pay for the services, which sounds normal. There are numerous specialists around the world doing this, having clients subscribing to a newsletter, etc. But these agencies make their downgrading public, possibly making the prophesies self-denying, but also self-fulfilling. Some of the clients are governments, lifting the activity from the corporate world market to inter-state geo-economics, and hence geo-politics.

This is dramatic. It means that sectors from one country have a de facto monopoly on a way of intervening in world politics. It is like the agencies used and paid to influence the flow of news that reaches the media, like Hill & Knowlton. It would be interesting to know who the clients are.

Now, on the other hand, corporations, like banks, funds and governments contemplating giving credit to a country, have a right to know the chances to get their money back, with interest. Credit may be used for bail-out and-or stimulus; to help the finance economy or the real economy in some country. That sounds like an act of solidarity. But good money poured on bad may easily turn bad. There is a risk involved, and the creditor is there to make, not lose, money.

And that raises, of course, the question: Is downgrading a method to ensure higher interest on the credit? The lower the grading, the higher the interest the government has to pay on its bonds to attract buyers. Many governments are today in deep trouble. Governments in less trouble may be interested in an “objective” outside agency doing the job of publishing, worldwide, donwgradings that will raise the rate.

German banks offer credit to Irish banks so that they can pay back earlier credits at higher interest. Is that a reason that we do not have a European agency; the American ones do the job?

We take note that the new prime ministers of two deeply troubled countries, Greece and Italy, and the new head of the European Central Bank, combine being economists with having worked at some time for Goldman & Sachs (good job, G&S!). Not only a profession, but an organization, on the casual side of the whole issue in top positions. And even if they are not on both sides of the table, their ideology probably is. Thus, from the agencies we never hear a word about reducing the military budgets. Greece seems to have the highest percentage in Europe, 3 percent, and Spain is acquiring arms by many held to be not only costly but also unnecessary–and, of course, mainly from the USA. The agencies focus on social, not military expenditure.

Myriam Fernández de Heredia, head of S&P ratings for Europe, Middle East and Africa, says, “We follow a prescribed methodology. We don’t just act on a whim”. Two analysts propose a rating to a committee of senior analysts. They, anonymously, five or seven persons to avoid a draw when voting, communicate by video conference or telephone. And the criteria?

She says: Five factors, political, economic, external liquidity, fiscal and monetary, each given grades from 1 to 6. The final rating, assessing potentials to meet debt payments, ranging from AAA to junk bond, is based on this scoring.

Of course, this information in a newspaper interview is insufficient to assess the assessments. Thus, one wonders, under “policy”, how do they rate the apparently successful policies by Argentine and Iceland, to a large extent self-reliant, refusing to fall into the debt trap? A debt to one’s own citizens, like US World War II debt, people buying bonds, or Japanese debt today, is less dangerous. But debt bondage to foreigners is; look at the Third World (EU is in-between).

There is credit squeeze, corporations and governments in default. But what produced the credit squeeze? The rising inequality, with decreasing buying power for the bottom 99%, and oceans of money at the top for irresponsible speculation. Stagnant real, galloping finance economy. China also has enormous inequality, but the bottom is lifted up, with a huge domestic demand increase, not sinking further. Do such factors enter in their assessment? How professional are they?

Democracy is transparency-dialogue, not just elections. World democracy does not have elections, making transparency and dialogue even more necessary. We need more insight, but can do without agencies with questionable methods and agenda.

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