Rating agencies: The unaccountable oligopoly that can destroy economies

RT @leftfootfwd: Rating agencies: The unaccountable oligopoly that can destroy economies: http://bit.ly/f9sBlJ writes Mark Anderson

RT @leftfootfwd: Rating agencies: The unaccountable oligopoly that can destroy economies: http://bit.ly/f9sBlJ writes Mark Anderson

RT @leftfootfwd: Rating agencies: The unaccountable oligopoly that can destroy economies http://bit.ly/dIf5t0 Very, very interesting

RT @leftfootfwd: Rating agencies: The unaccountable oligopoly that can destroy economies: http://bit.ly/f9sBlJ writes Mark Anderson

RT @leftfootfwd: Rating agencies: The unaccountable oligopoly that can destroy economies: http://bit.ly/f9sBlJ writes Mark Anderson

RT @leftfootfwd: Rating agencies: The unaccountable oligopoly that can destroy economies: http://bit.ly/f9sBlJ writes Mark Anderson

RT @HitchinEngland: RT @leftfootfwd: Rating agencies: The unaccountable oligopoly that can destroy economies: http://bit.ly/f9sBlJ write …

Rating agencies: The unaccountable oligopoly that can destroy economies: Greece's financial trouble for instance… http://bit.ly/dV4ZTV

I think it has become clear that the kind of approach that this government is taking here is far from guaranteed to help the economy grow, and thus actually cut the deficit.

@leftfootfwd: Rating agencies – they're rather like the modern day Jews apparently, controlling the world… http://bit.ly/dIf5t0

A public rating agency or agencies, randomly assigned, would be a good idea.
http://realignmentproject.wordpress.com/2009/07/09/salus-populi-and-the-market-automatic-regulation/

RT @leftfootfwd: Rating agencies: The unaccountable oligopoly that can destroy economies: http://bit.ly/f9sBlJ writes Mark Anderson

RT @leftfootfwd: Rating agencies: The unaccountable oligopoly that can destroy economies: http://bit.ly/f9sBlJ writes Mark Anderson

OSTRICH SHOOTS MESSENGER!

The simple fact is that if you want to borrow other people’s money, it is up to them to decide whether you’re good for the loan and what the risk/reward ratio should be, based on whatever advice they choose to take.

This applies to individuals, corporations and governments alike.

This is the reason that I am paying 0.68% on my mortgage while the Labour Party is paying nearly ten times as much (6.5%) to its creditors.

As far as the UK’s record since WWII is concerned you might like to note how, while we engaged in an orgy of nationalisation and established the NHS religion, we were overhauled comprehensively by our erstwhile enemies in Germany and Japan.

It’s almost as though LFF was trolling us. Still here we go::

1. Comparing our current situation to that directly after WW2 just suggests you don’t have the slightest clue what you’re talking about. Our deficit then was due to fighting a massive war. And although I know the late 40′s are the socialist wonderland you can’t actually be telling us they were all that great. Or are you actually suggesting food rationing as the solution to our problems?

2. It is frankly Orwellian doublethink to suggest Greece’s trouble was not sparked by its massive government deficit. It’s just laughable. “It had no basis in market fundamentals”. Running a massive deficit you have not hope of getting rid of after years of dodgy accounting isn’t a market fundamental and while undergoing a recession isn’t a market fundamental? Do you even know what that means?

Basically you think that governments should always be lent money at low interest rates regardless of the size of their deficits or their chance of ever paying the money back. And anyone who suggests otherwise is evil. You are a out and out believer in the magic, money tree, and really shouldn’t be criticising the logic of anyone else’s arguments.

The idea that the agencies are to blame for Greek, Irish and Portugese mismanagement of their economies and that bondholders would have carried on oblivious of the manifest inability to sustain their current level ofcdebt, is laughable. A fourt agency funded by the issuers won’t change that. Ostrich shoots messenger indeed.

Well done Mark on bringing an international perspective to the task of understanding the deficit problem – the simplistic ‘home economics’ approach favoured by so many really does need to be dispatched once and for all if we are to stand any chance of putting the British people’s interests before those of international finance.

Well done Mark on bringing an international perspective to the task of understanding the deficit problem – the simplistic ‘home economics’ approach favoured by so many really does need to be dispatched if we are to stand any chance of putting the British people’s interests before those of international finance.

13eastie.

You say:

“The simple fact is that if you want to borrow other people’s money, it is up to them to decide whether you’re good for the loan and what the risk/reward ratio should be, based on whatever advice they choose to take.”

This simplistic kindergarten type of logic can equally used to justify loan sharking. As t of your comments, it is of little relevance or application.

It is equally naive to assume value neutrality with regard to ratings agencies. A substantial component of their revenues is derived from consultative services they provide to the financial services sector. They are unlikely to bite the hand bite the hand that feeds them. If you look at some of their past ratings and took their “sound” advice you would have purchased shares in Icelandic banks or in GM.

Stephen W,

You are the last person to complain about trolling.

Good (if slightly dense) article on the evil oligopoly of Credit Rating Agencies http://t.co/mrGX2j6

RT @kieronam: Good (if slightly dense) article on the evil oligopoly of Credit Rating Agencies http://t.co/mrGX2j6

I’m afraid you’re living in a fairytale if you think that hiding credit views from investors will somehow make them more willing to continue financing unsustainable government deficits at attractive rates. Stopping Moody’s publishing ratings won’t stop investors coming to the view that, for example, Greece continues to face considerable difficulties with revenue collection. Governments shouldn’t expect to borrow money from investors and then deny them access to informed views.

If another agency is created (and it’s not clear why a new agency funded by issuers should be any more independent than an existing issuer funded agency) then investors will only pay attention if it provides information of value.

@6

The reason loansharks exist is because other lenders smell a rat with their customers. Were this not to be the case, loansharks would be unable to compete. Once again, this is the reason the Labour Party has to pay ten times as much interest as I must (unless it has taken to giving its members cash away to its millionnaire chums).

What you call “kindergarten logic” and “naive” is simply the recognition of the facts that, money, when lent, and no matter in what quantity, still belongs to real people (this is the truth that socialists always think they can ignore), and that that person is entitled to be confident of getting it back. It makes no difference whether they are buying premium bonds or gilts.

The left continues to be unwilling to accept that the disastrous state of our public finances is the fault of anyone but the “banks” and the “credit crunch”.

But what is even more perverse is to follow this up by trying to construct an argument that my mother’s pension company should then “invest” her money by offering no-questions-asked credit willy-nilly to bankrupt governments overseas.

Why is it so EVIL of banks to lend money to people who apply for sub-prime mortgages (they are only trying to make a better life for their families), but so NECESSARY that they give cheap loans to governments desperate both to buy votes domestically and to prop up the concept of the utopian super-state on which they’ve staked their reputations?

The paradoxical argument continues…

Mark believes that their is no problem with PIGS public finances. You claim that the ratings agencies would not “bite the hand that feeds them”.

If you are both correct, why are S&P etc. steering their clients away from easy pickings in PIGS? Surely this would be (for want of a better expression) to bite the hand that feeds them? Surely you don’t think this would actually please the institutional investors that pay for such advice?

Worth bearing in mind of course that issuers, including the PIGS government, pay S&P for their ratings.

13eastie,

If Pollyanna was bellicose and belligerent individual, this would probably be your ideal name change.

You say:

“What you call “kindergarten logic” and “naive” is simply the recognition of the facts that, money, when lent, and no matter in what quantity, still belongs to real people (this is the truth that socialists always think they can ignore), and that that person is entitled to be confident of getting it back. It makes no difference whether they are buying premium bonds or gilts.”

I honestly do not know where to start with such nonsense. I might recommend you read John Lanchesters’s book “Whoops”. It is a very understandable straightforward description of Global finance and the underlying causes leading up to the collapse of 2008. The cash on the barrelhead notion implied by your statement simply does not and has not applied to global financial transactions in modern times, if it ever did. The chapter entitled, “The Cashpoint Moment” should be particularly informative for you.

You also state:

“The left continues to be unwilling to accept that the disastrous state of our public finances is the fault of anyone but the “banks” and the “credit crunch”.
But what is even more perverse is to follow this up by trying to construct an argument that my mother’s pension company should then “invest” her money by offering no-questions-asked credit willy-nilly to bankrupt governments overseas.”

The point to note is that unlike equities, where common share investors can loose virtually all of their holdings, government finance, particularly in regards to western industrialized economies, do not carry the same risk. Institutional credit downgrading, or increased lender risk, has simply meant an increased in the premium charged by the lender, not a risk to the lender’s capital via defaulted loan. Government revenues generated primarily from taxation, whose levels as indicated by GDP, whether to the PIIGS, the US or post earthquake Japan are simply not items that are subject to foreclosure. While government payment defaults may be close to occurring in some emerging nations. E.g. Haiti, maybe Zimbabwe, etc, and have occurred in the past to poorer nations, (based primarily on high interest charged) it did not happen in the Western economies during or post the 1930s depression and has a remote chance of inflicting the current industrialized world.

I don’t think the agencies are suggesting 100% loss of principal, but there’s clearly a risk that the government debt is unsustainable and some form of restructuring sees bondholders take a bath. it’s simple not true to suggest that there’s zero risk of default. That’s, maybe, a 20% risk and I don’t think it’s at all outrageous to have third parties publish research on the topic. What’s clear is that investors have judged that there’s a risk of impairment and pricing reflects that. It’s simple not credible to suggest that profit hungry investors are asking for 7%+ rates in a world where policy rates are close to zero, on the expectation that in no set of circumstances will there be a default.

Sorry, I should be more specific and say that I’d judge there to be a ~20% risk of impairment on Greek bonds.

@13eastie – I think scandalousbill has about covered it. Any attempt to explain the workings of international finance that fails to include the role of powerful vested interests in coordinating and manipulating events to advantage those with capital is bound to be a waste of time.

@10

“The Lender”!

You’d have us believe that a single lender sets yield. This is simply obtuse. The price is set in the market. There is nothing preventing anyone from lending more cheaply to Greece etc. should they feel like it. BUT THEY DON”T

“Remote chance of inflicting the current industrialised world” Really? How much did British investors lose when Argentina defaulted?

An independent credit rating agency is a great idea. An agency not beholden to either the banks, investors or national governments will finally give us a fair rating system where people in Greece, Ireland, Portugal, Spain and other countries are not needlessly punished simply for living in a country where their Government does not follow the ‘neo-liberal’ orthodoxy of public service cuts.

13eastie,

If you read, which I will now concede, may well be a stretch for you, you may understand how absurd your comments are. The market you refer to is far from the monolithic objective entity you allude to. Again, John Lanchester is really a must read for you,

BTW, how many investors lost because of Madoff, Lehman Brothers, GM, Equitable Life, Marconi, etc. etc..?.

Price is the point where supply meets demand for dog food and lending, and everything else in life.Dog food is a stable business.Sovereign debt is subject to the whims of politicians, hence rating agencies.They do get it wrong.I recommend granting BP December 2012 560 puts for which you will get a cash premium of 125p, against a market price of 460p. 560-125=435.Risk, oil prices halve.Maybe…, ask a rating agency set up by the European Commission , who apparently are omniscient

Mark Stevo,

You say:

“I don’t think the agencies are suggesting 100% loss of principal, but there’s clearly a risk that the government debt is unsustainable and some form of restructuring sees bondholders take a bath. it’s simple not true to suggest that there’s zero risk of default.”

Fundamental questions arise.

1. Do banks and other financial institutions hedge risk? would say yes.
2. Does securitization tend to magnify risk. Again, I would say yes.

Not to belabour a point, but referring back to Lanchester, his point on Credit Default Swapping, (CDS), outlines a practice used that while not necessarily implying a zero risk strategy, (although I would say in the short term, pretty damn close,),clearly outlines a hefty and effective mitigation tool used by financial institutions as an “insurance” against principal loss.

Banks hedge risk, they don’t eliminate if (you can’t earn a 15% roe at zero risk). You’ll have to explain to me how securitisation relates to the current conversation around government bonds.

By which I mean the buyers of CDS are not always the buyers of government bonds, and there’ll be someone on the other end of the CDS trade who’ll also be pricing risk. A CDS doesn’t make the risk disappear, it just transfers it to someone else.

Mark Stevo,

If you consider the size of the institutions involved, the intermix is virtually unavoidable. It is simply a diversification of portfolio, where Peter pays Paul.

I don’t have the evidence to say one way or the other whether banks are fully hedged on sovereign debt (although I’d suggest that the outcome of the recent “stress tests” makes it pretty clear that they’re not). That being said, you’re still not addressing the point that even if they are, someone, somewhere, is exposed to sovereign default risk by being in the other end of a CDS trade and their pricing of risk will be driving yields. You can’t make the risk disappear.

I still don’t follow how securitisation relates to this debate.

Mark Stevo,

Perhaps the differences emerge from viewing events from a holistic approach or as self contained phenomenon. While an analyst may view things from a sector specific perspective for greater clarity of understanding, this perspective may not necessarily reflect global corporate policy or practice.

If I could draw your attention to the massive US bailout of the banks that occurred during the early years of the Obama administration, the banks predominantly spent the bailout funds ion the purchase of Chinese currencies. To me this was a massive hedge. The gains from a harder currency vis a vis the falling dollar were written back against losses in other sectors of the institutions’ business. While this activity did little to bolster the US economy, or the poor mortgage holder, it did favourably impact the bottom lines of the banks overall performance and profitability, and played no small part in reinstating the bonus culture.

My position is that such overlaps are commonplace within financial institutions. While one can view global financial transaction as the interplay between independent institutions, or even between nation states, I feel that much insight can also be derived from viewing Global financial activity from the perspective of the vertical integration of large financial institutions is this case.

The discussion so far has related, I think, to whether the agencies are responsible for a higher yield on government debt than would otherwise have been expected. To argue that credit analysts in banks should buy government bonds at lower yields because, in any event, the government will bail them out, seems nonsensical. The banks got into trouble, in part, by mispricing risk and having them do it again won’t help.

Needless to say of course, it’s not just “too big to fail” banks buying these instruments, pension funds are doing the same. Are you advocating the world financial system provides then the same bailout and that there should be a collective guarantee of every nation states debt by every other nation state?

Out of interest, will you be snapping up these bonds if they’re so attractive?

With todays rate of inflation, not likely.

So yields on government bonds are too low?

In relative terms, yes

I’m struggling a bit here – you’re criticising investors for asking for too high a yield while at the same time saying you think they’re too expensive as well?

Not at all, I would not go the bond route because in the context of rising inflation, middle east oil uncertainties and Japanese reconstruction their are better options IMHO for my money.

Thanks for the comments. In relation to some of the criticism:

Prior to the collapse of Lehman Brothers, Greece didn’t have an inflated deficit and its economy was growing.

The collapse of Lehman Brothers (which the credit rating agencies helped bring about) precipitated a global private sector slump which caused Greece to go into a recession which inflated its deficit.

The Greek government’s dodgy accounting merely added to what was principally a private sector-induced deficit caused by the banking meltdown of late 2008.

To deal with the deficit while the banks were still rebuilding their balance sheets, Greece needed to support its damaged private sector through public sector stimulus so as to return to growth and pay off its deficit. It should have been, essentially, as straightforward as that.

Instead, the same credit rating agencies who precipitated Greece’s troubles went and cut the rating on the country’s sovereign debt and insisted that Greece’s rating would not be bumped back up unless it started ripping up its public sector. This despite the fact that Greece’s public sector was serving as a financial lifeline to a battered private sector that still wasn’t being lent to by the banks.

The Greek government, faced with dangerously spiralling bond yields, felt it had no option but to comply, and so started cutting public spending in order to get its rating bumped back up.

The spending cuts took money out of the economy and caused further damage to Greece’s private sector, further denting Greek GDP and making it harder to pay off the deficit which the credit rating agencies were supposedly so eager to see tackled.

Greece’s spiralling bond yields were brought about by the panic which the attack on its credit rating induced on the bond markets, not by it having an enlarged deficit per se.

The Greece that emerges from this credit rating agency-mandated public sector bonfire will be less well educated, less meritocratic and less able to create a vibrant private sector.

A more rational credit rating agency that had the best interests of ordinary people at heart would not have cut Greece’s credit rating and insisted on spending cuts when Greece’s private sector was not yet in a position to do the leg work and when banks still hadn’t started lending again. The credit rating agencies we currently have simply aren’t up to the job.

It’s worth remembering that PwC have estimated that the loss of 500,000 jobs in the UK public sector will have the likely effect of precipitating another 500,000 more job losses in the private sector. Massive public sector spending cuts at a time when the private sector is still weak just isn’t good economics.

I suspect 13eastie’s mortage interest rate has more to do with the very low interest rate set by the BoE than his own credit worthiness, as is tha case for hundreds of thousands around the country. He won’t be crowing so loudly when they start going up again. After hubris…

Mark, I’m afraid I can’t agree that Greece’s deficit was sustainable pre-Lehman given that it has run at a deficit every year since 2000. There are clear structural issues that make the accumulated debt unlikely to be repaid and to blame the agencies for highlighting as much is simply shooting the messenger.

“A more rational credit rating agency that had the best interests of ordinary people at heart would not have cut Greece’s credit rating and insisted on spending cuts when Greece’s private sector was not yet in a position to do the leg work and when banks still hadn’t started lending again. The credit rating agencies we currently have simply aren’t up to the job.”

Is this a joke by the way? If agencies deny the obvious (allegedly in the interests of ordinary people) then investors will ignore them and yields will blow out anyway. You will not fix this problem by trying to hide that it exists (not least because you can’t hide it).

Mark Stevo,

(Here we go again)

You say:

“Is this a joke by the way? If agencies deny the obvious (allegedly in the interests of ordinary people) then investors will ignore them and yields will blow out anyway. You will not fix this problem by trying to hide that it exists (not least because you can’t hide it).”

I would like to know how you would respond to the observations made by Joseph Stigliz at the time.

http://www.guardian.co.uk/commentisfree/2010/jan/25/principled-europe-not-let-greece-bleed

“For the ECB to announce that it will not accept Greek bonds as collateral would be counterproductive. For the ECB to delegate judgments about the credit-worthiness of Greek bonds to the rating agencies would be more than just irresponsible; it would be reprehensible. Delegation of effective regulatory responsibility to the rating agencies is partly what got the world into the present mess; and the rating agencies’ judgments have proven to be deeply flawed – underrating the risk of mortgage backed securities, but consistently overrating the risk of certain sovereign debts”

I think that Stigliz’s argument could well support the position Mark Anderson has outlined.

Stiglitz criticising the agencies, he acknowledge the “deep rooted structural problems” of the Greek economy and urges the EU to stand behind the debt. I’m not sure any of that suggests that the agencies (and investors) are wrong in forming the view that without some form of credible EU-wide support there will be an impairment of principal.

Sorry, meant to say Stiglitz ISN’T criticising the agencies (at least not in this piece).

OK, so when he says:

“Delegation of effective regulatory responsibility to the rating agencies is partly what got the world into the present mess; and the rating agencies’ judgments have proven to be deeply flawed…”

He is prasing their efforts and admiring their track record?

No. I said he wasn’t criticising, not that he was praising. I’m not sure what in my post could have led you to that conclusion. This article isn’t about agencies, it’s about the EU and it’s perceived lack of support.

Oh. So when I say that your judgement is deeply flawed, that would not be a criticism?

Sorry, I see your point. I don’t think anyone can deny they catastrophically underestimated risk historically. I don’t however, accept that they are overestimating the risks around sovereign debt impairment. There’s simply nothing in this piece to suggest that the agencies where wrong to downgrade Greece. Again, this is an article predominantly criticising the EU for not standing behind Greek debt and it’s hard in my view (and haven’t seen anything to the contrary either in the Guardian article or in this thread of comments) to see how, without EH support, Greek debt can be viewed to be on a similar risk profile as Germany.

Mark Stevo,

The debt to GDP ratio has been pretty well a standard measure for the ability of nations to cover/repay sovereign debt. Yet Pre-earthquake Japan has consistently had a higher debt/GDP ratio than the restated Greek figures even if they are applied postadated to undo the Greek government/Goldman Sachs cover-up, or in your previous example, back to 2001. It is abundantly clear that such a distinction figures nowhere in any of the ratings provided by the agencies in any given year. The downgrading of Greece seems to be based on factors other than the objective economics to which you allude.

RT @leftfootfwd: Rating agencies: The unaccountable oligopoly that can destroy economies http://bit.ly/dIf5t0

I think the agencies have been considerate of debt / GDP ratios in the past (not least when they downgraded Japan in January). Nevertheless if would seem foolish to take debt /GDP on a standalone basis without considering ability to fund ad it’s reasonably clear to investors that there’s been a ready willingness if domestic investors willing to buy Japanese bonds and that hasn’t been the case for Greece. I’m not sure focusing on a single metric is going to be at all helpful.

No one is arguing for a single metric based analysis, the description was used to highlight the discrepancies within the rating agencies outlook. The case of Japan indicates a consistently high level of debt with minor adjustments over the history the Japanese production post lost decade. This contrast very sharply with the ratings for Greece, the PIIGS as well, not to mention the recent posturing by the Tory coalition and the spectre of horror based upon their misguided credit card analogies. There does seem to me, at least, to be a definite ideological bent to the activities of the ratings agencies, and this has had an adverse impact of the nations concerned.

Mark Anderson has made a valid point, reform is needed in this respect.

There clearly is a discrepancy between the agencies outlook for Greece vs Japan, but why shouldn’t there been when the depth of capital willing to buy Japanese government debt is so much deeper? Why focus on the debt / GDP number and ignore the greater pool of capital ready to refi Japanese government bonds?

“Why focus on the debt / GDP number and ignore the greater pool of capital ready to refi Japanese government bonds?”

My understanding is that Japanese investors have over the years predominantly preferred foreign bonds, particularly US, so the domestic capital appetite was not the key factor. In fact, given the recent disaster, there is considerable concern that Japanese repatriation of Capital can have a negative impact on US and European bonds.

No. Japan has a much deeper base of domestic investors in government bonds reflecting a prolonged period of a high savings ratio (including domestic individuals, banks and insurers). An inflow of capital into Japan does indeed seem likely, but reflects a combination of insurance claims (both foreign and domestic insurers who have deployed assets abroad) and universes rebuilding spend. You’re right that it’ll likely impact on US and European credit spreads.

Oh FFS, my iPhone related spelling woes get worse and worse. Hope that made sense…

Debt is an obsolete concept in our modern world.
The nations should agree to stop financing investment using debt and print the money instead.
Our infrastructure is decaying while we have capable people on the unemployment scrap heap all because we worship money.

Can someone explain the Economic logic of credit rating an International Government. Obiously the concept is a prudent one when it comes to individual businesses, especially in the here today, gone bankrupt tommorrow business culture that were moving towards and i completely agree with the principles that businesses have a choice of lending providers they can shop around for the best deals. But this same principle doesnt apply to a state…. Its always going to be there in some shape or form. Even if a state goes bankrupt they again need to borrow money to get them selfs out of the orginal debt, usually from the IMF, thus suggesting that they are borrowing from the IMF to pay former creditors…. hence all repayments from a Government must be close to 100% guarenteed to be repaid. Taking this into consideration along side the known positive economic impact financial stimulus has on the overall economy and the fact most western countries operate a fiat currency system that means the currency is no longer tied to gold or commodoties that have to be stored in the bank as collatoral. Sounds like a pretty logical step to start providing relatively high volumes of low interest debt to National Governments. This being the odvious outcome of a Public European Ratings Agency. My only concern is that the money should be reseved for capital expenditure on long term infrustructe projects.Such as creating sustainainble and self sufficient energy,transport and communication infrustructure that forms the back bone of every country.

Gd Q frm Frank Dobson on why we invest so much importance in the credit rating agencies – See http://t.co/reF9MhMm for more on the subject

Gd Q frm Frank Dobson on why we invest so much importance in the credit rating agencies – See http://t.co/reF9MhMm for more on the subject

Gd Q frm Frank Dobson on why we invest so much importance in the credit rating agencies – See http://t.co/reF9MhMm for more on the subject

Gd Q frm Frank Dobson on why we invest so much importance in the credit rating agencies – See http://t.co/reF9MhMm for more on the subject

Gd Q frm Frank Dobson on why we invest so much importance in the credit rating agencies – See http://t.co/reF9MhMm for more on the subject

Gd Q frm Frank Dobson on why we invest so much importance in the credit rating agencies – See http://t.co/reF9MhMm for more on the subject

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