Thursday, 20th October 2011
We should be wary of credit rating agencies, writes Struan Stevenson
A copy of this article was published in The Scotsman on 20 October 2011.
Like weather forecasters, the major credit rating agencies (CRAs) claim to have the ability to tell us what the future may hold. But painful experience tells us that, like weather forecasters, they are often mistaken in their interpretation of the facts collated. Or worse still, they tell us to pack an umbrella when we’re already soaked through.
This weekend’s Eurozone crisis summit is designed to guarantee a rescue fund that will give a much-needed dose of confidence to entire economies teetering on the brink. Yet, amid rumour that Moody’s may unilaterally downgrade France’s cherished AAA status, we must be wary of the potentially malign influence of these agencies on the deal’s success.
Earlier this month, we saw that despite Italy’s low current borrowing needs and low private-sector debt levels, Moody’s decided to downgrade its credit rating, despite the CRA’s own admission that the chances of an Italian sovereign debt default were “remote”.
The CRA analysts blamed market sentiment for their turn against Rome. But essentially, Italy was punished, not because of any sudden increase in structural weakness, but because Moody’s perceived that the markets had become more sensitive to existing issues. Soon after, Moody’s downgrading of 12 UK banks, including Lloyds and RBS, was not due to any change in the financial positions of those firms, but because the CRA perceived a potential change in the Treasury’s stance on future bailouts.
There are, of course, perfectly valid reasons for such pronouncements by the CRAs. But there is something fundamentally wrong with a system that allows them directly to influence the confidence of investors and the success of political summits by manipulating the ratings of governments and companies alike, based on a subjective reading of what those very investors might possibly be thinking now or in the future. Surely systematically highlighting market fears of potential trouble down the road by marking them with credit downgrades just perpetuates a self-fulfilling spiral of negativity?
It seems to me that the stakes right now are just too high for these unaccountable CRAs to be taken at face value each and every time they issue the results of a negative review. Their pronouncements merely serve to increase interest rates while downgrading confidence, not just in the financial markets, but in a wider economy that is already pitifully short of confidence.
We shouldn’t let the CRAs determine our response to the current financial crisis, any more than we should let weather forecasters tell us where to build flood defences on a rainy day. After all, where were they in 2008 when all of this started?
