Death by credit rating…and neo-liberalism.

Posted: August 9, 2011 in The economy

To paraphrase Karl Marx, a frightening spectre is stalking Europe: it is the age of the credit rating agency.  Although they have a long history, operating with a very low profile only now have their names etched themselves on the public consciousness. Denise Finney sums up their role thus:

“Credit ratings provide individual and institutional investors with information that assists them in determining whether issuers of debt obligations and fixed-income securities will be able to meet their obligations with respect to those securities. Credit rating agencies provide investors with objective analyses and independent assessments of companies and countries that issue such securities […]

“[…] The analyses and assessments provided by various credit rating agencies provide investors with information and insight that facilitates their ability to examine and understand the risks and opportunities associated with various investment environments. With this insight, investors can make informed decisions as to the countries, industries and classes of securities in which they choose to invest.” (Investopedia).

All rather benign and mundane isn’t it?  Yet, since the financial crash in 2007/08, agencies such as Standard and Poors, Moody’s and Fitch (formally, the Fitch Group) have gone a bit further than just provide “information and insight” for investors.  Between them, they have been holding a gun to the head of democratically elected governments and threatening to pull the trigger if they don’t do what they’re told. They have been disseminating what S&P call “market sensitive information” that has caused chaos on the world’s stock markets, shaken the foundations of global financial regulation and subverted sovereign governments. Normally, that kind of activity would be labelled “economic terrorism” and the perpetrators hunted down. But in the Alice in Wonderland of the global economy, it’s called “free market economics”.

It appears that the IMF or the World bank, controversial organizations at the best of times but at least accountable to the elected governments that ultimately bankroll them, no longer call the shots; it’s the CRAs. They have taken a map of the world and divided countries up according to investment grade or non-investment grade economies. The former category includes economies with the best quality companies and financial instruments and thus the safest bet for investors while the latter includes those likely to default on their existing obligations and are to be avoided like the plague. As we have seen only recently, not even the US is safe from the CRAs – it has lost its Triple A rating for the first time in the history of this kind of credit rating. The US is still a good bet for investors but the impact of that readjustment was immediate and frightening. “Nightmare on Wall St”, was the headline on MSNBC. “Dow takes 635-point tumble after S&P downgrades US credit” (8 August). And the contagion of fear has spread as fast as a London riot, with stock markets all over the world suffering record plunges.

But this isn’t a matter of abstract numbers and graphs. It threatens another global recession or even depression and thus ultimately affects us all. So why is it allowed to happen?  So far, only the Italian courts have investigated CRAs (specifically S&P and Moody’s) on suspicion of “criminal practices” such as insider trading and market manipulation. The CRAs concerned have denied it, of course, and I’d be very surprised to see any convictions.

No. There needs to be a concerted, worldwide effort to bring these agencies to account and to regulate their activities. But more importantly, we’re going to have to recognize that the financial chaos they have partly caused and on which the stock market gamblers have profited by billions is the direct result of neo-liberalism gone mad.

Time then to dig a big hole and bury this disgusting ideology for good.

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