How influential are ratings agencies and their downgrades?
The weekly circus of ‘will they, won’t they’ always seems to end in ‘yes, they will’ as another country suffers another rating downgrade somewhere in the world. The three major agencies, Moody’s and Standard and Poor’s of the US and the majority-French Fitch, take it in turns to lower debt and credit in a not-so-merry-go-round of economic crises.
The three agencies named above control nearly all the market between them. They rate risk and assess the strength of structures and values of various institutions. They analyse any entity, from a local council in the UK to a multi-national bank. And, of course, governments.
Politicians in those governments get worked up by unhelpful negative rating and downgrading of countries’ rescue and bail-out plans. While Greece lies on a hospital bed and European doctors argue outside the room, the credit rating warnings and negative updates are like secret turns of the key in the lock, cutting Greece off even further from hopes of a recovery. But swifter action in the first place from the EU and more attentive ears to the words of the agencies could well have led to a more positive situation than the current atmosphere.
Some politicians, such as Italian PM Silvio Berlusconi, have reacted with shrugs and finger-pointing to downgrades. Certainly, after one of the big three lowers a rating there is at times a complacent attitude displayed when the other two come knocking later.
Prime ministers and bankers can work themselves into a fever trying to avoid the haunting removal of letters from a rating. The agencies hold immense power – the decision by Standard and Poor’s to take away the US’s AAA rating in August was seen as a major decision for consideration in the 2012 elections, despite the votes being 18 months away.
It has seemed in the past that patronising and slavish attitudes has been misplaced – the agencies infamously failed to forecast the first tremors of the 2007-2008 credit crisis; indeed, those tremors were hidden below the masses of top ratings the agencies were mistakenly handing out.
They do perform good work and their advisory and analytical roles on government policies, particularly the eurozone’s measures, are seen as critically useful. But they are for-profit organisations and some economic commentators feel there is a conflict of interests in their actions. They can deal heavy blows to economies and send markets into frenzies with their decisions and so, at this crucial time – especially for the euro – there is a serious need for more calm negotiation with finance ministries (who themselves must stop fudging the issue and get on with sorting out Greece). Missing the first part of this credit crisis doesn’t mean the agencies have to make up for it by being overly critical now.