Losing The Credit! – OpEd

The European Union is quite right to lambaste the ratings agencies for their “questionable” behavior in downgrading the sovereign debt of Portugal to junk status. It is high time that somebody challenged these agencies and demanded that they should be made accountable for their dubious judgments.

A kickback against the raters began this week when Italy called in representatives of Standard and Poor’s (S&P) to quiz them on why they had decided to rate Rome’s new government austerity package as carrying significant risks, and therefore by implication, was unlikely to ensure the stability of the country’s finances.

Yesterday the European Commission accused the ratings agencies, Moody’s, which had just passed its severe judgment on Portuguese bonds, of inappropriate behavior. At the same time German Finance Minister Wolfgang Schaeuble announced that he wanted to “break the oligopoly of the ratings agencies” and limit their influence.

The struggles of the euro zone to deal with the financial woes of Greece, Ireland, Portugal and Spain, are being undermined by the regular downgrades from the agencies. The negative judgments of these bodies are virtually self-fulfilling. Even worse the doubts and uncertainties engendered by downgrades of one or two countries, then spread to other euro zone members. If S&P is to be believed, Italy is now in the frame for trouble. It will surely not be long before similar warnings are given about Belgium.

Confidence is a key ingredient of financial markets. By issuing warnings over the creditworthiness of whole countries, the ratings agencies are driving out that confidence and sponsoring panic. As a result we see millions of ordinary people particularly in Greece, Portugal and Ireland suffering increasing hardship and unpredictability in their daily lives.

Yet these are the selfsame credit ratings agencies that were instrumental in bringing about the financial crisis by giving high investment grades to packages made up of highly dubious US sub-prime mortgages. Their incompetence allowed an immense house of cards to be built which when it tumbled, triggered the recession in which the developed world is still mired. Now their behavior is exacerbating the damage they have already caused and adding to the difficulties that countries face as they struggle with economic recovery.

This ridiculous and dangerous situation cannot be allowed to go on. The ratings agencies have to be made accountable for their judgments. Just as important, a transparent system needs to be established which will allow their decisions to be challenged and reviewed.

At the moment they exert immense power without an iota of responsibility. Thus far they have walked away scot-free from their grievous misjudgments in the sub-prime debacle. Incredibly perhaps, the international financial markets still seem prepared to take notice of what they say. This is largely because there is currently not a more convenient way of assessing risk for investors.

It is now time that regulators and politicians around the world took a hard look at the ratings agencies. The Europeans have given the lead this week. Other countries, not least the United States needs to join them.