Ratings Are Often Fire Starters, Not Fire Stoppers
The big U.S. ratings agencies are under constant fire from European politics — something that they can partly attribute to themselves.
For months, all of Europe has hung on the words and judgments of the big U.S. ratings agencies. Almost like in the gladiator fights in ancient Rome, [Europeans] are waiting to see if the three big agencies — Standard & Poor’s, Fitch and Moody’s (which together have over 90 percent of the global market share) — will lift a finger to help countries like Greece, Portugal and Ireland or not. Recently, the latter was the case: The ratings were partially downgraded to junk status, with devastating consequences for the borrowing costs of the affected states. In the case of Greece, the contribution of billions of dollars from banks, which was forced through with political pressure, is threatening to collapse because it would be judged a national bankruptcy by the agencies. Consequently, the burden of payment would fall on the taxpayers alone once again.
In the meantime, a study out of the University of St. Gallen [Switzerland] published a devastating conclusion: “Ratings agencies can’t predict national bankruptcies, but can cause them in specific situations, and thereby project them.”
The examiners not only played a less-than-glorious role three years ago in the Lehman Brothers crash: Just a few days before the bankruptcy that unleashed the global financial crisis and recession, they had still awarded the bank the highest ratings for its solvency. And to this day, despite extremely high debts, the USA is very highly rated.
What is clear is that a ratings ban, which some people are calling for, is senseless. A financial expert has paraphrased the situation well: “The fever isn’t gone just because someone takes away the thermometer.” What is vital, though, is that a sharp eye is finally kept on the ratings agencies, and if a European rating counterbalance were created, it could only be advantageous.
For months, all of Europe has hung on the words and judgments of the big U.S. ratings agencies. Almost like in the gladiator fights in ancient Rome, [Europeans] are waiting to see if the three big agencies — Standard & Poor’s, Fitch and Moody’s (which together have over 90 percent of the global market share) — will lift a finger to help countries like Greece, Portugal and Ireland or not. Recently, the latter was the case: The ratings were partially downgraded to junk status, with devastating consequences for the borrowing costs of the affected states. In the case of Greece, the contribution of billions of dollars from banks, which was forced through with political pressure, is threatening to collapse because it would be judged a national bankruptcy by the agencies. Consequently, the burden of payment would fall on the taxpayers alone once again.
In the meantime, a study out of the University of St. Gallen [Switzerland] published a devastating conclusion: “Ratings agencies can’t predict national bankruptcies, but can cause them in specific situations, and thereby project them.”
The examiners not only played a less-than-glorious role three years ago in the Lehman Brothers crash: Just a few days before the bankruptcy that unleashed the global financial crisis and recession, they had still awarded the bank the highest ratings for its solvency. And to this day, despite extremely high debts, the USA is very highly rated.
What is clear is that a ratings ban, which some people are calling for, is senseless. A financial expert has paraphrased the situation well: “The fever isn’t gone just because someone takes away the thermometer.” What is vital, though, is that a sharp eye is finally kept on the ratings agencies, and if a European rating counterbalance were created, it could only be advantageous.
The goal is to provide investors with an indication of the likelihood of the bonds being repaid, which affects the interest rate investors will demand before purchasing. “Helping” the countries by understating risk of default isn’t how capitalism works.