The whole world in their hands: the unchallenged power of the rating agencies. By AlexWard.
In this bleak era of economic paralysis, the only constants that have prevailed throughout the entirety of the global financial crisis are risk and uncertainty. On January 12th, Standard and Poor’s downgraded France – joint-chief compere of the Eurozone’s economic horror show and its second largest economy. The very same day, the economies of Spain, Italy, Portugal and numerous other members of the Eurozone suffered a similar fate. More recently, Moody’s changed the UK’s outlook from ‘stable’ to ‘negative’, prompting Chancellor of the Exchequer, George Osborne, to reaffirm that the state’s commitment to austerity measures was not likely to fall by the wayside anytime soon.
In the current state of affairs, it is beyond doubt that the ratings agencies wield an astronomical level of power over governments, often cajoling them into implementing profoundly unpopular austerity measures under the threat of a downgrade. Yet, their status as the arbiters of the global economy is rarely put into question. It bears repeating that the role of these agencies is the secret to their power; they provide a sense of order and clarity to a world imbricated with uncertainty, providing impartial estimations of financial strength and creditworthiness for would-be investors.
At face value, this arrangement seems both logical and desirable. At a deeper level however, the ratings agencies can act capriciously, precipitating the disorder that they are supposed to counterbalance against. Defendants would claim that the agencies solely serve as the messenger, not in any sense the architect of all the mayhem that characterises the contemporary financial system. To counter, I would draw attention back to the original source of the current economic misery, the subprime mortgage crisis, wherein many securities rated highly by the credit rating agencies were swiftly and vastly devalued at the onset of the crisis, bankrupting countless investors and heavily contributing to the downward spiral that eventually became the global depression.
Thus, rather than mitigate uncertainty, ratings agencies amplify it. They fan the flames of speculation, impacting upon business confidence and stifling innovation as decision makers sit on capital rather than risk losing it. What’s more is that whilst risk and uncertainty propagate, the demand for the ratings agencies to impose order upon the system also mounts, entrapping the economy into a positive feedback mechanism of unpredictability.
Overreliance upon the rating agencies follows, and that’s exactly what situation we’re in currently. Worst still, the duopoly of the rating agency market, with both S&P’s and Moody’s appropriating roughly 80% market share between them, raises further concerns. In particular, in the absence of competition, transparency issues and flaws in the actual ratings themselves are pervasive. The sub-prime mortgage blunder aside, the ratings agencies’ inability to predict crises (the Asian financial crisis, Enron’s bankruptcy and deteriorations in both AIG’s and Lehman’s creditworthiness, to name a few) has raised significant criticism.
Nevertheless, there remains no panacea to replace the ratings agencies. As uncertainty becomes more of a definitive tool for understanding and framing the developments of the international economy, rating agencies will only gather more influence. They also cannot be silenced, as ratings are mere opinions, protected by free-speech laws. One option would be to reverse the outsourcing of risk judgment from governments to ratings agencies. It seems improvident to place the fate of whole currency zones at the whims of two or three private firms, who’s past record of judgment is hardly unblemished. However, nationalizing the role of ratings agencies would open a can of worms that is simply incompatible with the neoliberal model of western capitalism, rendering this option wholly unfeasible. One glimmer of hope lies in increasing competitiveness. This would ideally rectify transparency issues, whilst ensuring a certain level of prudence and diligence in the formulation of ratings. Overall though, there are no substantive or substantial signs that the ratings duopoly is to face more competition anytime soon and governments continue to act upon the vicissitudes of Moody’s and S&P’s. As such, the global economy is sure to feel the squeeze as overawing uncertainty tightens its grip. For this writer, this dreary situation calls for a downgrade of my own – from ‘outlook: negative’ to ‘outlook: bleak’.