asianaffairs

All credit, no credibility

International credit ratings agencies are a feature of grasping capitalism that, despite their enormous influence, are not to be trusted, argues David Watts.

By David Watts

THE LADY IS FOR TURNING: Angela Merkel has spoken strongly against a market solution to the problems of the euro zone

President Obama abhors them and the leadership of the European Union, not to mention several European governments, would like to see them brought under control. It seems nobody likes the international credit rating agencies, except when their opinions suit the policy-makers.

The American president was quick to pounce on Standard and Poor's when they downgraded the United States' sovereign debt rating from AAA to AA+. With US sovereign debt at $14.3 trillion and the nation's annual output at $14.7 trillion, one could see they had a point.

But the White House called it a 'facts be damned decision' when the agency overstated US debt by $2 trillion, an error S & P admitted whilst still declaring it made no difference to their overall assessment.

But by that time everyone in the US government seemed to have forgotten that it was Washington's endorsement of the deadly mortgage-backed 'securities' in 2003— which had nothing of value behind them — that got the world into the whole credit crunch debacle in the first place. Certainly the agencies, in turn, endorsed the securities but it is unlikely that they would have done so with such facility had not the US government already done so.

In short, credit rating agencies are another aspect of sabre-toothed capitalism that are no more to be trusted than any other despite their enormous influence. They rate private companies in return for a fee — which may explain why they had nothing negative to say about US mortgage suppliers — but they declare their opinions on the state of the finances of national governments free of charge. A downgrade from an agency can lead to higher interest rates as lenders seek a higher return to protect themselves in case the loan is not repaid.

But, working hand in glove with US big business and the big international financial institutions, the agencies, which are largely American-based, are in a position to force national governments to sell off the 'family silver' at knock-down prices to pay off the national debt. Infrastructure and industry move out of the national patrimony, unless the nation's politicians have the guts to resist and ensure that the country is not sold down the river.

And the agencies make good money: for the three-year period ending in 2007, the height of the credit boom, S & P's operating profit rose 73 per cent to $3.58 billion while Moody's, another of the 'big three', made a comparable gain of 68 per cent for a profit of $3.33 billion.

What irked the American government in particular was the obvious point that the United States has always been a stellar performer in meeting its obligations and would continue to be able to do so, downgraded or not. Despite warnings from the Chinese and others that the US must start to act responsibly, that is still the case. Despite the dire predictions as the downgrade hove into view, the world financial system did not collapse after S & P's pronouncement and despite the best efforts of the world's capitalist predators, Greece, Spain, Portugal and Italy are still functioning states.

But not thanks to the agencies' efforts: when Greece lost its investment-grade rating from the 'big three' at the start of the European debt crisis in January 2010, its borrowing costs soared, locking it out of financial markets and thus forcing the European Union and the International Monetary Fund to come up with a rescue package. And when the EU was trying to structure a new Greek bailout where private sector bondholders would take on more risk, Moody's took it upon itself to pronounce that to roll over their debt would be tantamount to a default. EU officials were furious because defaulted Greek bonds would have wrecked bank balance sheets and worsened the cost of the euro zone crisis.

So no wonder that then German Finance Minister Wolfgang Schaeuble called for the agencies' oligopoly to be broken up, while the European Central Bank president, Jean-Claude Trichet, has expressed similar sentiments. And European Commission president Jose Manual Barroso complains that the agencies have an anti-European bias.

The Greeks now face the prospect of their infrastructure, from highways to the Athens Metro and the national lottery, being bought up by foreigners to pay their short-term bills. All the profits that those assets would have accrued will now land in foreign bank accounts while the nation's long-term debt stretches over the horizon. Yes, of course Greeks should be more assiduous about paying their taxes and governments should have been more disciplined in keeping national expenditures within acceptable parameters but the agencies' dogged pursuit of Athens now seems set to condemn the country to poverty in perpetuity.

Also unremarked is the fact that by the credit rating agencies' standards, Japan, with its colossal national debt, should have sunk beneath the economic waves years ago after its problems became severe in the early 1990s.

But Japan was wise enough to make sure that its indebtedness remained within the country and that is one route to warding off all who might destroy a nation's economic heritage. Because for all the Western world's portrayal of capitalism as a universal good — much like America's trumpeting of the value of freedom, when what they are really talking about is freedom for the people of the United States — the West is only really interested in expanding its opportunities to make money. Mercantilism is all about extracting value whether it be by pumping oil out of the ground or driving the industry and government of other nations to the wall in order to take over their assets and run them at a profit.

The scale of the damage that would be done to Europe should the American model of impoverishment be pursued has now dawned on the German Chancellor, Angela Merkel, who has come out strongly against a market solution to the problems of the euro zone. 'Politics cannot and will not simply follow the markets,' she said, reversing the Thatcherite dogma of the market's supremacy. 'The markets want to force us into doing certain things, and that we won't do,' she added, reinforcing her determination not to resort to the issuing of Eurobonds to meet the indebtedness of European nations which would be underwritten by the European Central Bank.

The drastic route of indebtedness has been avoided before, most notably by Malaysia during the Asian crisis of 1997-98 when currency speculation against the ringgit drove the economy to the brink. Despite being pressed by the US and others to take on International Monetary Fund assistance, the then Malaysian prime minister, Mahathir Mohamed, refused and sought a way out of his problems by tying the currency to the US dollar. It worked, and Malaysia recovered from the malaise much quicker than heavily-indebted neighbours Indonesia and Thailand.

A key modern example is Iceland, whose banks went into meltdown owing billions in Britain, among other countries. In a national referendum the people of Iceland decided to go bankrupt and start again from scratch. The government then elected to default and thus avoided taking massive interest-bearing loans from the international community. It is now in a position to start paying off its debts without losing any of its prized national industries.

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