How credit ratings agencies rule the world

Just who are the mysterious agencies who take it upon themselves to grade everything from countries to corporations – and how much power do they really wield?

Patrick Kingsley
Guardian
February 16, 2012

… Along with Fitch, and Standard & Poor’s (S&P), Moody’s are one of the Big Three credit ratings agencies. They sound like a trio of preppy clothing companies, but in fact they are some of the most powerful players in world finance. Specifically, they rate the “creditworthiness” of companies and currencies. In the process, it is hoped that they give investors an idea which investments are safest to make.

“Hello, Moody’s!” I say. “I would like to know the rating for UK sovereign debt.” It’s a topical question. The eurozone crisis has seen countries’ ratings fall across the continent. Chancellor George Osborne has staked his reputation on helping the UK avoid the same fate. My adviser will ideally come back to me with three particular letters: AAA. This is the highest rating Moody’s offers. Then comes AA1, and the scale goes down to C. Anything below BBB is known as “junk”.

“The UK has a rating of AAA,” says Ms Moody. But then comes the hammer-blow: “We also have a negative outlook for the UK.” This negative outlook – which Moody’s announced on Monday – isn’t quite AA1, but it’s the preamble to it. The lower their outlook, the more likely Moody’s thinks the UK government is to default on its debts – and the less likely it is that people such as me will want to lend it money. The lenders that do remain will be more nervous about the prospects of getting their money back – and so they’ll charge higher interest rates. And the higher the interest rates, the steeper the government’s debt repayments, and the more likely it is to default. And so it goes on.

It is an Escherian cycle, and one in which the credit ratings agencies – many argue – play too powerful a role. “I am no fan of conspiracy theories,” said Rainer Bruederle, a former German economic minister, after S&P threatened to downgrade 15 EU countries in December, “but sometimes it is hard to dismiss the impression that some American ratings agencies and fund managers are working against the eurozone.” But Europeans aren’t the only ones up in arms. “S&P has shown really terrible judgment and they’ve handled themselves very poorly,” said US treasury secretary Timothy Geithner after S&P downgraded America’s AAA credit rating in August. “They’ve shown a stunning lack of knowledge about basic US fiscal maths.”

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This article was posted: Thursday, February 16, 2012 at 9:57 am

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