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BackThey are among the high priests of casino capitalism. When they put their thumb up or down, most investors follow like lemmings, even when faced with the abyss. The list of their misdemeanours and their failures is long, entailing serious consequences for taxpayers and employees, but without repercussions for themselves. Because they hide behind their own interpretation of freedom of opinion. The rating agencies.
When businesses or governments need capital, they have to undergo a rating assessment by rating agencies. Given today’s financial capitalism, this makes life significantly easier for investors, as they no longer have to analyse themselves whether an investment is good or bad. The simple stamp of approval of a rating agency is enough to make the herd of investors and speculators to buy or sell a paper.
And even though they are among the apologists of the free market, they themselves are not very keen on competition. About 95 % of the global business of rating both enterprises and governments is dominated by three mega rating agencies (Standard & Poor’s; Moody’s, and Fitch), whose owners (often major financial investors and media groups) are often interlinked.
This is added by the fact that rating agencies like to keep their cards close to the chest. How they reach their rating, is in most cases a well-kept secret, which cannot be comprehended by the public. Another problem: The “pupils” (businesses and governments) are paying the “teachers” (rating agencies) for the rating they receive. Hence, conflicts of interest are pre-programmed.
In the past, all these structural problems have time and again resulted in serious failures of the rating agencies. Hence, many experts apportioned a fair share of blame for the outbreak of the financial crisis to them. After all, they had given top grades to almost all junk mortgages, which turned out to be worthless after the outbreak of the crisis. The agencies also played a particularly questionable role with regard to rating governments. Following long years, when they could see countries of the Eurozone only in a positive light, they have now joined the ultra-pessimists and threaten one Euro country after the other to downgrade its creditworthiness. With catastrophic consequences for policy and population. Being downgraded by rating agencies immediately pushes up interest rates for government securities of the countries concerned and massively increases the price of borrowing on capital markets. Up to the point, where interest rates are so high that countries such as Greece or Portugal can no longer afford to meet their interest payments and as a result are effectively cut off capital markets. This only leaves two options: the country faces bankruptcy or the other Euro partners must come to the rescue.
Engrossed in their financial market euphoria, the European Commission and the Member States for many years stood idly by, watching the activities of the rating agencies. Only after the outbreak of the financial crisis, the Commission started its first timid regulation attempts, initially a registration obligation for rating agencies, and then placing them under European supervision. The continuing structural problems, which politicians and the population had to face up to during the Euro turbulences of the past months, remain unsolved to this day.
Hence, faced with political pressure, this week in Brussels, the European Commission has announced a proposal on regulating the rating agencies, which is supposed to break their disproportional power. Regrettably, however, the Commission is once again embroiled in internal disputes. Concerning two issues, which found great interest in the media, the responsible French Commissioner Michel Barnier was not able to reach agreement with his fellow Commissioners and had to climb down.
The first issue concerns a ban, which Barnier had originally planned in respect of rating agencies, whose market share exceeds 20 % (effectively the three big ones), preventing them from buying and swallowing smaller competitors over a period of 10 years. The objective of the ban had been to prevent these giants from becoming even bigger and more powerful. Barnier was not able to push through his plan.
The second issue concerns a temporary ban, proposed by Barnier to prohibit rating agencies from rating countries in financial difficulties as this would further fuel the downwards spiral. This plan too did not find a majority in the college of Commissioners.
Nevertheless, the Commission Proposal, which now has to be debated by the European Parliament and the Member States, includes a number of sensible provisions. For example, the official reference to ratings from agencies, which is included in many laws and technical standards, is to be systematically combed through and weakened. In future, banks and other investors should no longer slavishly adhere to the ratings of the agencies, using them as an excuse; they have to assess the risk of an investment themselves, which after all is their very own core business.
Apart from that, businesses have to change their rating agency more frequently (rotation) to prevent too much familiarity between teacher and pupil. And: the agencies have to disclose how they reached a rating. Until now they have been content to provide often hardly comprehensible and ominous reasons, which in many cases are also spiced with political judgements, which the rating agencies, acting in a democratic vacuum, are not entitled to make. The Commission also proposes that rating agencies should be liable to civil law in future. So far, the agencies like to refer to their freedom of opinion, and by including a simple paragraph on their homepage to the effect that their ratings are only non-binding opinions, they shrink from assuming any responsibility. Hence, all failures and glitches, as the incorrect downgrade of France’s credit rating, which happened recently, remain without consequences for the high priests of financial capital, whilst the employees have to carry the consequences of the austerity dictate of the financial markets.
Link to the proposals of the Commission on the regulation of rating agencies (currently only available in English): http://ec.europa.eu/internal_market/securities/agencies/index_de.htm
And even though they are among the apologists of the free market, they themselves are not very keen on competition. About 95 % of the global business of rating both enterprises and governments is dominated by three mega rating agencies (Standard & Poor’s; Moody’s, and Fitch), whose owners (often major financial investors and media groups) are often interlinked.
This is added by the fact that rating agencies like to keep their cards close to the chest. How they reach their rating, is in most cases a well-kept secret, which cannot be comprehended by the public. Another problem: The “pupils” (businesses and governments) are paying the “teachers” (rating agencies) for the rating they receive. Hence, conflicts of interest are pre-programmed.
In the past, all these structural problems have time and again resulted in serious failures of the rating agencies. Hence, many experts apportioned a fair share of blame for the outbreak of the financial crisis to them. After all, they had given top grades to almost all junk mortgages, which turned out to be worthless after the outbreak of the crisis. The agencies also played a particularly questionable role with regard to rating governments. Following long years, when they could see countries of the Eurozone only in a positive light, they have now joined the ultra-pessimists and threaten one Euro country after the other to downgrade its creditworthiness. With catastrophic consequences for policy and population. Being downgraded by rating agencies immediately pushes up interest rates for government securities of the countries concerned and massively increases the price of borrowing on capital markets. Up to the point, where interest rates are so high that countries such as Greece or Portugal can no longer afford to meet their interest payments and as a result are effectively cut off capital markets. This only leaves two options: the country faces bankruptcy or the other Euro partners must come to the rescue.
Engrossed in their financial market euphoria, the European Commission and the Member States for many years stood idly by, watching the activities of the rating agencies. Only after the outbreak of the financial crisis, the Commission started its first timid regulation attempts, initially a registration obligation for rating agencies, and then placing them under European supervision. The continuing structural problems, which politicians and the population had to face up to during the Euro turbulences of the past months, remain unsolved to this day.
Hence, faced with political pressure, this week in Brussels, the European Commission has announced a proposal on regulating the rating agencies, which is supposed to break their disproportional power. Regrettably, however, the Commission is once again embroiled in internal disputes. Concerning two issues, which found great interest in the media, the responsible French Commissioner Michel Barnier was not able to reach agreement with his fellow Commissioners and had to climb down.
The first issue concerns a ban, which Barnier had originally planned in respect of rating agencies, whose market share exceeds 20 % (effectively the three big ones), preventing them from buying and swallowing smaller competitors over a period of 10 years. The objective of the ban had been to prevent these giants from becoming even bigger and more powerful. Barnier was not able to push through his plan.
The second issue concerns a temporary ban, proposed by Barnier to prohibit rating agencies from rating countries in financial difficulties as this would further fuel the downwards spiral. This plan too did not find a majority in the college of Commissioners.
Nevertheless, the Commission Proposal, which now has to be debated by the European Parliament and the Member States, includes a number of sensible provisions. For example, the official reference to ratings from agencies, which is included in many laws and technical standards, is to be systematically combed through and weakened. In future, banks and other investors should no longer slavishly adhere to the ratings of the agencies, using them as an excuse; they have to assess the risk of an investment themselves, which after all is their very own core business.
Apart from that, businesses have to change their rating agency more frequently (rotation) to prevent too much familiarity between teacher and pupil. And: the agencies have to disclose how they reached a rating. Until now they have been content to provide often hardly comprehensible and ominous reasons, which in many cases are also spiced with political judgements, which the rating agencies, acting in a democratic vacuum, are not entitled to make. The Commission also proposes that rating agencies should be liable to civil law in future. So far, the agencies like to refer to their freedom of opinion, and by including a simple paragraph on their homepage to the effect that their ratings are only non-binding opinions, they shrink from assuming any responsibility. Hence, all failures and glitches, as the incorrect downgrade of France’s credit rating, which happened recently, remain without consequences for the high priests of financial capital, whilst the employees have to carry the consequences of the austerity dictate of the financial markets.
Link to the proposals of the Commission on the regulation of rating agencies (currently only available in English): http://ec.europa.eu/internal_market/securities/agencies/index_de.htm