European socialists call for regulation of the ratings agencies


 

The Party of European Socialists, the European political party which Labour is a member of, has hit out at the power of credit ratings agencies following S&P’s decision to downgrade nine Eurozone states on Friday.

The President of PES, Sergei Stanishev, of the Bulgarian Socialist Party, said:

A dozen anonymous analysists with no shred of legitimacy and a proven track record of gross inefficiency, effectively decided on Friday to make life much harder for millions of Europeans. This agency, like the others, is acting subjectively, politically and irresponsibly. This is an international scam that has to stop.

Commenting on proposals for regulation of the agencies, Stanishev continued:

Either we accept the domination of CRAs and we continue to weaken our societies, or we rebuild democratic standards in our society.

We can ban the rating of states: banks are more than adequately equipped to do their own assessment of risk. We can force CRAs to be held accountable and to act in a transparent and predictable way. We can rate CRAs and link their assessment to their past performances.

Most importantly, we can create a European Independent Credit Rating Agency, which would be the only one allowed to provide rating for regulatory purposes.

Writing on Left Foot Forward in advance of S&P’s downgrades, Ben Fox argued:

While S & P’s threat is certainly a massive over-reaction it is scarcely surprising. It fits into the pattern of behaviour by the rating agencies – too generous in the boom years, swinging to being far too severe in the hard times.

The main problem has been that credit ratings have increasingly tended to become a self-fulfilling prophecy rather than a sensible assessment of creditworthiness.

Downgrading the credit rating of Greece, Irish and Portugal to junk status made it much harder for those countries to service their debts and made bailouts inevitable. If Spain, Italy or, indeed, any country were to suffer a downgrade it would push them into further difficulty.

The problem the EU has is that regulation of CRAs is, at heart, a free speech issue. While it is true that they have huge power, disproportionate to both their record and their accountability, so too do other organisations – to pick just one example, News International.

If Stanishev can navigate this issue successfully, the threat to democratic governance from the CRAs could be reduced. But, just as with dealing with our dodgy press, the desire to come down hard with regulation and censorship may be counterproductive.

See also:

Politics vs Economics: setting the scene for the Fabian’s Next Economy conferenceMarcus Roberts, January 13th 2012

Eurozone crisis: A threat or a promise from the credit rating agencies?Ben Fox, December 6th 2011

If the right cares about sovereignty, why the silence on credit agencies?Alex Hern, November 22nd 2011

The current crisis: brought to you politician by inaction and unaccountable credit rating agenciesGeorge Irvin, August 8th 2011

Rating agencies: The unaccountable oligopoly that can destroy economiesMark Anderson, March 11th 2011

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  • Sam

    It beats me how they will ban the rating agencies from doing anything. The three main agencies are based in the US, the Constitution will protect their right to free speech. Any ratings they publish will be over the internet in 5secs (even if europeans are forbidden to know them officially!). The markets will pay heed to the ratings if it serves their purpose, otherwise not. This cry from the heart is really Canute telling the waves to retreat.

  • Anonymous

    +++MEMO FROM EUROPEAN UNION CREDIT RATING AGENCY+++

    Greece has a AAA Credit Rating

    Greece has always had a AAA Credit Rating

    +++MEMO ENDS+++

  • Anonymous

    Quite.

    So when times were good, and they gave AAA ratings to junk countries, are you going to insist that the lenders get extra interest payments from the likes of Greece?

    Thought not.

    I know. Lets shoot the messenger.

    Remember too about the UK’s AAA rating. That rating is just about the bond holders getting a default over the next 10 years.

    It says nothing about the pensioners getting a default, partial or full, on their pensions. It’s just another debt that the government owes.

    Remember, if the pensions aren’t on the books, then the plan is not to pay them.

    It’s a Ponzi.

  • Anonymous

    Mind you, it does have some legs.

    I think I’ll ask Labour to set me up as the only ratings agency. Nice bit of regulation stops all the competitors.

    Then a few back handers, and governments can have the credit rating they want. After all, you’re worth it.

  • Awake!

    Fitch is majority owned by a french company- wonder if they will downgrade french debt?
    So hardcore leftie IN EUROPE calls for a US company to not be allowed to sell research to another company in the US.
    Why would left foot forward print that, it makes the left look stupid??

  • Blarg1987

    I agree that the credit ratings agencies need to be rewviewed as their track record is not very good aka the financial crisis. However part of me thinks that part of the problem is that for speculatros it is easier to bet against a country defaulting and so they will do whatever they can to encourage this.

    This practice should be made illegal so as to stabalise the overall economic situation as short term betting for financial gain leads to large amounts of poverty and harship for millions of people, an example is how many people are now in fuel pverty because of higher energy costs brought about by the speculation on energy prices?

    However some european countries do need to manage their debt problems also.

  • Awake!

    ‘Most importantly, we can create a European Independent Credit Rating Agency, which would be the only one allowed to provide rating for regulatory purposes.’
    Thus Mammon spoke…
    So this guy wants to add another tool toi the arsenal of clowns

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  • awake!

    I agree that there have a notorious cases of speculators forcing consumers to pay up, but the most notable was enron, and it was an inside job- guys at the power stations were getting paid. This fallacy that speculators destabilise marhets forgets the important fact that the trade has to be correct to come off- if i keep selling £5 notes for 4.99, well i won’t change the value of a fiver…
    Now lefties will auto jump to this guys defence- remember, your local council might invest in investments that this eurokok clown led rating agency determines a s safe on political grounds.
    French debt and others that got downgraded were trading at levels that implied a LARGER downgrade for quite a while now-these agencies tend to follow, not lead (mostly).
    Ring up a lawyer, ask him for his opinion and see how you get on suing him if he’s wrong…
    CUCKOO!!
    And finally, the euro clown said
    ‘A dozen anonymous analysists with no shred of legitimacy and a proven track record of gross inefficiency, effectively decided on Friday to make life much harder for millions of Europeans. This agency, like the others, is acting subjectively, politically and irresponsibly. This is an international scam that has to stop’
    Now, replace analyst with politician and you’ve pretty much got the truth.

  • Awake!

    FITCH EXPECTS RATING REVISION OF 6 EURO ZONE STATES WILL END WITH DOWNGRADE OF 1-2 NOTCHES IN MOST COUNTRES – SENIOR FITCH ANALYST
    Stangely, this French owned entity has said it’s unlikely it will downgrade France

  • Anonymous

    Is it easy?

    For example, if you and I have as bet on the Man Utd match this Saturday, does our bet affect the result?

    After all, you’re betting one way, supporting Man Utd, and I’m betting the other way. It’s balanced.

    So for every seller, there is a buyer.

    The cause of the poverty and hardship isn’t the speculators, its governments. Governments who have run up massive debts, primarily to their own citizens, that they can’t pay.

    As for fuel poverty, look to the Greens. If you force people to pay 800% more than the cost of electricity from other sources, its going to cause problems.

    It’s just state cronyism, the real problem. Get the state to protect you so you don’t compete. (Greens) Get the state to bail you out (British Leyland to failed banks). Get tax perks like the film industry that aren’t offered to others. Steal directly like MPs and peers.

    Where are the higher prices caused by speculation? Its higher prices because demand is up, or supply is down. Are you saying that the oil producers should be forced to sell below market cost? How are you going to make that happen? We have no more gunships to send in.

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  • Blarg1987

    If we look that after the financial crisis, the cost of things such as energy and food futures skyrocketed on the markets as investors pulled their money out of property and needed something secure to invest their money.
    The other example wis when the war started in Libya fuel prices went up over 10%, considering it produces only 5% of the worlds oil supply what else could have caused the increase unless people were betting on the future price of oil going up.

    Your analagy of the football teams I understand but what has happened in the markets is that someone needs to make money for their investor, they see a country is ok but see they can make money out of it so they start a rumour its rating is going to fall and so bet aginst it, people start to question why people are betting against it and hear the rumour and so they do the same thing, lenders hear and see this and think something dodgy must be going on so increase the level of interest they charge and so causes the problem.

    Granted it is partially down to citizens being unable to pay that has caused poverty but you can not say that someone who decides to borrow shares in a company then drives down the share price to buy them at a cheaper price is not responsible either.

  • Nick Leaton

    Libya. If you take the supply out from Libya and other countries affected by the Arab spring, that cuts supply. Demand doesn’t change. So up goes the price. The other producers (not speculators), just up the price. People like Chavaz. The problem isn’t ‘Libya’, its that the arab spring will spread.

    There are no rumours. Greece is bust. It’s not fiction. So people want to hedge their risks, so they buy something that profits if it falls. To do that, they need someone who thinks the opposite. You want to make your case by drawing the boundary around the hedger, ignoring their other positions, ignoring the people that think otherwise and buy the country.

    So if we take the shorting in shares example. What’s the responsibility of the person lending the shares, hoping to profit when the price goes up? After all you can’t have one without the other. You mistake is to try and exclude the other party from your case. You can’t. You need two to tango, and they form a system. That system is a zero sum game. One wins, one loses.

  • Nick Leaton

    The problem with governments is that they have done what Bernie Maddoff did.

    If you don’t report your debts, you can use new cashflows to pay off your debts, until the cash flows in aren’t sufficient. ie. Run a Ponzi.

    Greece did do Enron style accounting, using Swaps to transform their deficit pushing it down.

  • Blarg1987

    I did mean both sides of the system are as bad as each other, yes we know Greece is bust, as earlier posted but I meant other economies which are fairly secure are being attacked and would be interesting to note how much is based on speculation.
    I only mention Libya as yes the arab springhad already started but it had not affected trhe overall supply of oil, only when Libya reduce its supply did prices really skyrocket.

    The other interesting example was the sale of Volkswagon where people betted against the companies share price but in that case got badly burnt bear in mind this was at the time when people were speculating car sales would collapse and so fed on it, that is part of the problem with the economy at the moment, people ae betting negatively which in some very rare cases get burnt but usually could have a knock on affect as lower share prices mean less investment which feeds through to jobs and growth.

  • http://www.brandywine.com Mike Dever

    Of course they would (call for regulation of the credit rating agencies). They don’t even recognize the irrelevance of them. The bottom line is that the credit rating agencies are unimportant. Not just because they’re incompetent, which they’ve repeatedly proven. But because they’re unnecessary. That is because the markets already set the credit worthiness of any borrower that has outstanding paper. The price is out there. The price of credit default swaps is out there. That is the ‘real’ credit rating of a sovereign or corporate borrower. Ratings are both redundant and dumber than the crowd-sourced price that already exists. I talk about the failure of the credit rating agencies in my book “Jackass Investing.” I’m pleased to provide readers with a complimentary link to the chapter in which they’re discussed (Myth #13: It’s Best to Follow Expert Advice): http://bit.ly/ugSnBf

    Mike Dever
    Author, Jackass Investing: Don’t do it. Profit from it.

  • http://twitter.com/Newsbot9 Newsbot9

    Yes, I’m quite sure you’re all for monopolies and bribes. Typical of the right.

  • Nick Leaton

    You’re making a major assumption that they are safe.

    For example, the UK.

    Government debts of 7,000 bn, and a deficit the same size as Greece (10.5%) UK (10.4%)

    The UK is not safe.

    For Volkswagen, yep, they were insider trading. Should they be banned?

    Should Volkswagen be banned for naked selling as an example? It’s their standard practice.

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