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Rating agencies: Who made them so powerful?

Robert Peston | 09:05 UK time, Thursday, 29 April 2010

Is there any more powerful and feared institution in Europe (or the world) than Standard & Poors?

Greek flag and parliament building in AthensThis firm - whose ostensibly blameless activity is to assess the quality of credit that's traded on financial markets - has induced high anxiety in European Union governments and citizens by giving lower grades to the public sector debt of Greece, Portugal and Spain.

Loans to the Greek government have been categorised by S&P as junk, or carrying a high risk of default - whereas those who lend to Portugal and Spain have been told that their money is a little less secure than it was, with Spain having a significant quality edge over Portugal.

S&P's assessment of the growth prospects of these three nations, and their respective prospects for closing the ominous gaps between what their respective governments spend and what they raise in taxes, has induced gyrations in markets: the euro and share prices have fallen; the price of each of the three nation's government bonds has dropped, with those of Greece plunging, such that the implied cost of lending to Greece is now higher than that of much poorer, less democratic countries.

And there has been a frenzy of panicky meetings involving the International Monetary Fund, the German government, senior European Union officials and so on, to stitch up some kind of rescue deal for Greece, which may eventually involve eurozone states and the IMF extending more than £80bn of emergency credit to Greece.

Crikey. That S&P certainly knows how to make a noise.

Now, of course, S&P isn't responsible for the widening deficits of Greece, Portugal and Spain that represent the fundamental reason why confidence in those nations' creditworthiness - and in the value of the euro - has eroded.

S&P would claim to be an articulate messenger, an impartial analyst of the woes they face, not in any sense the creator of all this mayhem.

But it is nonetheless extraordinary that some relatively simple economic research by a private-sector organisation can have quite such an impact.

All the facts underlying that research are well-known and easy to obtain. All that S&P has done is to say that Greek debt is junk; but surely Greek debt can't in reality be junkier today than it was last week just because S&P says so?

You may wonder what on earth is going on. If S&P doesn't create economic reality - which it doesn't - how can its assessment of that economic reality wreak such havoc?

The answer is that S&P - and the two other leading credit-rating agencies, Moody's and Fitch - have been endowed with enormous authority by governments, central banks and regulators.

They are the gods of the credit markets, and made so by fiat of the Bank of England, the European Central Bank, the US Securities and Exchange Commission and so on.

The rating agencies' assessment of the quality of bonds or tradeable debt issued by public sector and private sector is, officially, the last word on the subject - and has been since the early 1970s, when the SEC in the US started using their ratings to assess the strength of securities firms' balance sheets.

So, for example, the Bank of England typically provides credit to commercial banks if those banks provide bonds as collateral to it that are classified as AAA by rating agencies. The ECB operates a lower quality threshold for the provision of funds or liquidity to banks, but still uses the rating agencies as arbiters of the relevant security or collateral quality.

Which in turn conditions the investment decisions of banks, insurance companies and pension funds: if a bond loses its AAA status, the potential size of the market for that bond shrinks, at a stroke.

By now I would hazard that a few of you will be shouting at the screen that these are surely the same rating agencies which gave AAA ratings to many tens of billions of dollars of tranches of collateralised debt obligations and issues of residential mortgage backed securities that turned out to be a very bad joke.

These AAA CDOs weren't the solid gold that the AAA badge implied: they were manure (although arguably lacking the functional benefits of good manure).

Many would say that S&P and the others played an important dishonourable role in fomenting the worst banking crisis since the 1930s. So how is it that S&P's word on the quality of Greek debt, Portuguese debt and Spanish debt carries any credibility at all?

It's curious, isn't it?

What is extraordinary is that almost nothing has been done by governments, or central banks or regulators to break the de facto monopoly of S&P, Moodys and Fitch in the business of rating bonds.

There has been a good deal of talk about reforming the way they are remunerated, to end the apparent conflict of interest arising from the convention that they are paid by borrowers (who obviously want the highest possible rating for their credit).

But isn't the real issue that the ratings troika doesn't face any proper competition, thanks to the official endorsement the firms receive from central banks and regulators?

Wouldn't it make sense for the Bank of England, the European Central Bank, the FSA, the SEC and so on to find other ways to judge the quality of the bonds that underpin their evaluations of banks' financial robustness.

Perhaps I am being over-squeamish, but it doesn't feel democratic or sustainable that the fiscal fate of nations and currency zones - and indeed the perceived strength of the financial system - rests on the analytical verdict of three private-sector research firms, the financial record of which has in recent years not been unblemished.

Comments

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  • Comment number 1.

    Is this the same Standard and Poors that rated Lehman Brothers as an "A" rating (the sixth highest investment rating) one week before Lehmans collapsed?

    Hmmm.....

  • Comment number 2.

    Complete agreement here: these bozos (could think of other terms but not acceptable ones for public utterance!) are given too much importance, their opinions are being treated as unquestioned, unchallengable fact.

    Take a break from economic analysis for a moment & trundle over to the Magazine and read the article on restaurant critics. All too true, opinion peddled as fact. (I know of what I speak, I am a respected reviewer in the obscure world of role-playing games. I give a new game a good review, its sales go up. Eeek. But I'm painfully aware that what I write is just my opinion, and try to provide as much detail as I can about what the game's like, so as to equip people with the information to decide for themselves. But I digress....).

    Any judgement needs to be open to challenge. Just because someone says so, however respected they are in the relevant area, it ain't necessarily so.

    If we decide that we think governments should have a role in the regulation of the world's financial affairs, they need to equip themselves with the knowledge to form opinions and make judgements for themselves. Not rely on people who are, after all, making their own livings out of peddling their opinions - just like restaurant critics.

  • Comment number 3.

    A good analysis of the power that these organisations hold - based on the recent past when will we see these ratings firms following others into the courts to explain and defend the positions they took?

  • Comment number 4.

    What does it matter who gives the verdict?

    More control and regulations means the monetary system will not function to its full potential, on the other hand less control and regulations means the system will get over-excited and function above its potential. Either way, it's [beep].

    It is the system, stupid!

  • Comment number 5.

    Excellent blog Robert. Seeing the grilling given to Goldman by the Senate, I really wonder why there has not been an even worse roasting of the credit agencies. If anybody was at the eye of that particular hurricane (Sub Prime Meltdown), that was the agencies; but they seem to have got off scot free! Perhaps their close relationship with the Central Banks is the reason; which makes me even more worried.

  • Comment number 6.

    These ratings agencies have no particular credibility. In 2008 they were calling everything "Triple A," when things obviously were not.

    This is nothing other than closing the door, that had been allowed to flap in the wind for a few years, the horse long having left.

  • Comment number 7.

    This is quite typical of this crisis, lots of complaining and finger pointing but very little real change. The only people giving way are governments, the private sector doesn't seem to be budging.

    So over 2 years on from the start of the crisis bankers renumeration still hasn't changed, regulation of these institutions is much the same, the ratings agencies seem unaffected etc.

    Without real change we are in danger of repeating this crisis the moment the painful memories start to fade.

  • Comment number 8.

    Well done Mr Peston . A fine article which tries to shed some light into the murky atmosphere of the financial world . The credit agencies' recent ratings of government bonds may be justified to an extent , however it is strange as you mention that in a multitude of other cases they were giving AAA ratings to financial institutions and their dodgy products until they went bust . Maybe they are too chummy with certain investment banks and hedge funds ? No way - that would be a conspiracy theory , wouldn't it Mr Dingle ?

  • Comment number 9.

    "Is there any more powerful and feared institution in Europe (or the world) than Standard & Poors?"

    Yes - the IMF.

    Ratings agencies are merely the 'bearers of bad news' - albeit late in some cases (like with CDO's) - you can't shoot the messenger just because you don't like what he says.

    What about personal credit agencies? - those that rate you and I - they often make mistakes and they are inaccurate - and anyone who has ever been on the wrong side of them will know the impact it can have on securing credit - forcing you, as countries are, to pay higher rates for your debt.

    However rating people is how the system likes to view people. Capitalism can't handle the myriad of differences between people and their finance - it likes to 'box us' so it can make judgements across large sections of the population.

    Unfortunately God (if there is one) didn't design man in this uniform way - which is why anyone trying to categorise humanity into neat little rows will always suffer 'shocks'.

    If you look at the CDO story in particular - they tried to simplify their ratings of these instruments to make life easier - but the mix of assets within wouldn't allow it - and once it was discovered - then came the shock.

    Surely this means Anarchy is the only way forward for mankind - I mean you cannot order us like Roman legions - so why waste all this time and effor trying.....and failing.

    Each credit rating should be done on an individual and 'one to one' basis - a bit like the traditional bank manager who assesed his customers individually before approving a loan - a very different story from today where an agency tries to assess many people from afar into neat little rows of 'credit worthiness'.

  • Comment number 10.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 11.

    Who made them so powerful!

    Vested interests - cash in on the organised volatility - with a little bit of insider trading of course

    Need to tip off all of the their friends before downgrading a currency and this takes time while an over-rated currency sits their looking stupid as triple A credit - like the British pound

    I think that it is called 'fraud'

    No one policing the trades to see the trends? How convenient?

  • Comment number 12.

    Lack of competition is a curious feature of this whole market. After all it makes no "market" sense that banks like Goldman can make such massive profits. And pay such stonking salaries for not very smart people (judging by the ones I've met) Someone should be doing it better/cheaper. This for me is the true disfunctionality of the market.

  • Comment number 13.

    Now Robert you touch on one of the underlying problems of the whole credit cruch fiasco, rating agencies. It is clear from the all the issues that are emerging that none of these banks, pension funds, insurance companies etc obeyed that golden rule 'do your own research'. They simply took the rating agencies view and then put their (our) money on whatever it was they were punting on that day. Clearly the army of 'analysts' employed by these financial institutions are a complete waste of time and money.

    In a similar way the rating agency for people, experian et al, are just as useless to really protect funds.

  • Comment number 14.

    Agree that S&P, Fitch and Moody's are all paid by those that use their services.

    However anyone who is in the pay of someone else, must by definition have a 'declared interest', so also by definition is neither NEUTRAL nor APOLITICAl, so cannot be said to provide 'objective analysis'.

    These agencies appear to have caused more havoc on one countries stability than any terrorism related activity.

    Interesting that within hours of US Senate panel's 'interrogation' of Goldman Sachs, Greece was declared 'bust'.

    'Objective analysis'?

  • Comment number 15.

    It will be interesting to note if such important economic questions are raised in the Leaders Debate tonight and how each party feels it should be addressed.
    Surely these continuing cosy relationships between financial institutions cannot be allowed to continue unchecked with who knows what consequences for countries and individuals in the future (yet again)!

  • Comment number 16.

    Absolutely right.

    Competition is what is required for these (American) institutions that rated slced and diced real estate as AAA.

    Financial tranparency is needed, even if this conflicts with commercial confidentiality and free-market ideology. At least this must be true at the sovereign level and for any larger institution requiring market funding.

    Maybe Greece has been less than honest in the past in their accounting and overspent for domestic political reasons. But given the reaction of the markets, who can blame them? They are probably not alone.

    Nothing is more likely to promote default than increasing interest rates to unsustainable levels. Thereby proving that the ratings agencies were right in the first place.

    We cannot continue to allow the troika to be prosecutor, judge, jury and executioner.

  • Comment number 17.

    Robert wrote,

    "the perceived strength of the financial system - rests on the analytical verdict of three private-sector research firms, the financial record of which has in recent years not been unblemished. "

    unblemished!!!! These American financial sycophants are there to give a false sense of security to lenders. It is plainly a nonsense to permit the situation to continue.

    For example every time California defaults they just downgrade to just above junk status where as Greece, that has not yet defaulted, is downgraded to junk. They give the distinct impression that they prop up the home market and exploit 'foreigners'!

    Their role in the fake valuation of CDOs that substantially caused the (first wave of) bubble and crash of the depression that we are just starting will I believe in historic perspective be seen as crucial. Now, an unreformed, ratings industry wishes to continue to make money by fiddling the rating of foreigners in the next wave - soon they will revert to the banks once again and point out that there are huge numbers of non-performing debts that will come out of the woodwork as soon as interest rates are returned to rational long term levels (as must happen) this will cause the third wave of this depression.

    I say, close the ratings agencies down now before they do any more damage, and replace them with US federal and European ratings agencies that are not in it for personal profit. (And force all loans to be rated and continuously reviewed - so that consolidated bonds can be properly rated and then only allow them to be exchanged through an open public exchange and bad all over the counter trading. Further make it illegal to 'insure' against default on loans that you have no direct interest in - i.e ban third party CDSs.)

  • Comment number 18.

    Yes, I think you are being over-squeamish Robert.

    If one accepts that the lack of accurate credit ratings pre-crisis were a major factor driving the size of the subsequent collapse, doesn't it follow that part of the solution is not to rose-tint the actual picture going forward? It might well cause short or medium-term pain, but as we've already caught a glimpse of, better to face that pain early than wait for the economies/banks/individuals to implode without warning.

    Mind you, there is an irony that banks considered too large to fail are now actively conspiring to bring down National economies. Talk about biting the hand that feeds! Revolutions will follow, and bankers and the current elites will reap the whirlwind of their short-term gains.

  • Comment number 19.

    A question that needs a lot more debate and understanding. Especially when it hits home to us - perhaps sooner rather than later in the term of the next Government than we may realise.

    The decisions of the rating agencies force the hands of Governments. A downgrading of the severity imposed on Greece leads into a downward spiral, an ineluctable vortex from which it is impossible to escape unscathed. And ultimately, it places the burden on the citizens of that country.

    Even if the "international community steps in", they exact a price paid for by skewing the democracy of the country affected. Not that democracy won't have suffered already under the burden of spiralling debt. This is the end game - it's not about money, it's about democracy, power and freedom.

    There is a debate that should be had before the coming General Election. However, given that more visible questions on the health of the UK economy are routinely ducked by all three parties (and have been carefully obscured, confused and obfuscated by the present Brown administration to boot), what hope we might debate a coherent plan for managing our Sovereign Debt and powers needed should it be downgraded?

    The answer? Well a clue is that it's not about raising taxation to meet debt increases. It's about cutting taxes and red tape and bureaucracy and undoing all the damage imposed on the private sector in the last thirteen years.

  • Comment number 20.

    The Debt Management Office often say the Credit Rating Agencies are a lagging, not leading, indicator of market sentiment. Bond pricing, they say, has already been adjusted before the Rating Agencies give their opinions.Dont know whether these bureaucrats are correct in giving this evidence to Parliamentary committees. Rather than target the messenger, one should keep feckless governments and their light-touch accounting in the cross-hairs.

  • Comment number 21.

    Some might say that a parallel exists with financial journalists; perhaps even those who, by broadcasting that a bank is about to run out of money, actually trigger a run on said bank thereby causing it to actually run out of money.

    To paraphrase the blog:

    "Crikey. That RP certainly knows how to make a noise.

    Now, of course, RP isn't responsible for the widening deficit of Northern Rock that represents the fundamental reason why confidence in that institution's creditworthiness has eroded.

    RP would claim to be an articulate messenger, an impartial analyst of the woes it faced, not in any sense the creator of all this mayhem.

    But it is nonetheless extraordinary that some relatively simple economic research by a public-sector individual can have quite such an impact.

    All the facts underlying that research are well-known and easy to obtain. All that RP has done is to say that Northern Rock is finding it too expensive to borrow overnight on the money markets; but surely Rock can't in reality be finding it any more difficult today than it was last week just because RP says so?

    You may wonder what on earth is going on. If RP doesn't create economic reality - which he doesn't - how can his assessment of that economic reality wreak such havoc?"



    Funny old world, isn't it?

  • Comment number 22.

    Of course private companies should not be left to determine status of various investments. Why do all these clever people in financial world pay large sums to the agencies to make assessments that they could easily make themselves? There is an obvious answer. Add to that the effect of their decisions on the well being of people is Greece, Spain and Portugal, to whom they are completely unaccountable, and the disastrous consequences of their decisions on the sub prime mortgage CDO's, and the case for reform or abolition is unanswerable.

    The central banks should take on the job of granting a new AAAA status to securities denominated in their own particular currency. They can create any amount of that currency, and so are uniquely in a position to provide absolute backing for these securities. Since creating such securities, if they are unfunded, is effectively equivalent to printing currency, their creation should be controlled by a central bank, and they should charge private banks a premium equal to the Treasury bill discount rate plus extra according to the risk, for an absolute guarantee.




  • Comment number 23.

    It's an idiotic system devised by idiots. No wonder the banks lost so much money.

  • Comment number 24.

    I think these agencies now carry a large amount of baggage from the credit crunch but when it comes to Greek debt they are probably right to warn investors. I do not think domestic institutions should be responsible for determining debt quality this would lead to the potential for some vintage 07’ sub-prime style ratings in my view.

    While the situation in Greece is alarming I do not know if the costs for the Euro are higher to prop it up or kick it out. They are a repeated offender in terms of deficit within the Euro rules and on that basis maybe should be kicked out as a warning to others.

    Although childish I cannot help get a sense of warmth from this after my former Phd student flatmate from Greece repeatedly complained about the UK as somewhere to live, and the state of everything compared with Greece, their profligacy is a stain on the Euro and is severely damaging to all Euro members and IMF funders who have their own problems.

    I like the idea of the debt financiers getting some islands, but I suspect this would just make the problem of getting a lounger by the pool from a German family all the more difficult. lol.

  • Comment number 25.

    My second point is that the G20 must move quickly to regulate the rating agencies, and the dependence placed upon them.

    This is more important and more urgent that a "Tobin tax", because once the national debt of certain larger Western economies starts to falter, the rest are lined up like dominoes.

  • Comment number 26.

    I see it that the ratings agencies role is to protect Wall Street and the dollar.
    Anyone want to discuss this view?

  • Comment number 27.

    Am I right in thinking that these three ratings agencies are all Amercian as well? How does the world ensure there is no national American interests being played out at a high level. After all the AAA ratings of CDO's based mainly on American sub-prime mortgages meant that lending to the American poor increased significantly and led to political as well as market gains for American interests at a time when they were investing heavily in an Iraq war.

  • Comment number 28.

    Question: What is a Bond Rating?
    Answer: Governments borrow money in big chunks called BONDS, which are eg. an IOU for 1,000,000 pounds. (Governments can't get all the money they like to waste from taxes, you see)

    Which Bonds are better? Well every government competes against other governments for the international money that is available. Of course, the US government is the biggest, so their bonds are considered the safest. This is why China has most of its savings in US dollar bonds. But safety is not the only attraction, because BONDS have to pay interest. The more interest they pay, the better. The less reliable, smaller, less safe governments, such as Greece, have to pay interest at a very high rate, at the moment over 15%.

    Who decides which Governments' Bonds are dodgy, and which are safest?
    Treasurers, the people who protect the International Money have accountants, auditors, and their bosses look over their shoulders, at least twice a day. They can't decide willy-nilly whether to put their corporation's or fund's money into the high rate bonds if those bonds are risky (might never get paid back). So they use a decision system, approved by their Management, where they compare the rating of an approved BOND rating agency against the interest rate they are getting, to decide which Bonds to buy.

    Why are there so few Bond rating Agencies?
    There is Standard and Poor's and there is Moody's, and I believe these agencies are the same ones that made the horrible mistakes that led to the Banking Crisis in 2007, because it was they who said that the sub-prime mortgage bonds were Top Quality.

    Where is the competition then?
    I don't know. In my opinion, Treasurers are not hired to rock the boat (they are paid relatively modest salaries, not commissions, for a very good reason that they should be safe and steady) , so they aren't going to be the drivers of competition. Robert Peston is the Economist. That competition is essential in a healthy market is a common-sense fact that was obvious to people even before Economics was invented as a discipline.

    Are governments really held to ransom by this system of International Finance? Yes, see what's happening to Greece? And this is interesting because Europe (and the Euro) was not designed to this level of detail. So the whole crisis could cause the idealistic naive fantasy of Europe to shrink back and consolidate. A principle of business (not Economics) is that you should never expand faster than you can cope with. Europe has expanded very, very fast over the last 10 years.


  • Comment number 29.

    Yes, very true.

    It's yet another cartel situation in a financial products market.

    (.....have governments noticed any pattern developing here, do you think?)

  • Comment number 30.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 31.

    And just who is going to decide whether countries or organisations are credit-worthy in place of the credit agencies? Central banks? Finance Departments? Or, God forbid, Governments?

    There's a reason that the credit agencies' words are taken as gospel - their vested interests are far lower than any of the other organisations involved. They may well not be completely independent, but they're certainly considerably more so than other organisations.

  • Comment number 32.

    Good work Robert

    I know your work and reputation depends on highly skilled detailed analysis of this or that, however it is very good to see you start to 'poke the whole thing with a stick,' and that must be very difficult and has not been done very much by established influential reporters up till now. If you start to expose the rotten situation for what it is, then no doubt powerful people will avoid you or give you a hard time.
    However if there is one thing that I have seen in all the financial blogs and all the 'have your say' comments, it is in this very uncertain time of change, that we need the truth.

    For example:

    There are some few people who are deliberately driving Greece into the ground because of greed. If they can do that to Greece they will try and do that to other countries, and they do not care of the suffering they cause...

    Or this very sinister line from the BBC

    "The only reason these massive bankers pay deals are needed is that no single bank or country can refuse them without facing financial disaster" BBC Friday 26 February 2010

    The implications of that sentence are almost too big to take on board. (I mean think about it) again this is way past rotten - we need to see the big picture, who is going to tell us the actual truth? the politicians? the bankers? Mr Preston? yes I hope so.

  • Comment number 33.

    A good article which I totally agree with.

    You however say nothing much about the remuneration of their management.

    Perhaps we should be looking at the Rating Agencies and their management as closely as we have been scrutinising the Banks and their management practices as both seem to equally to blame for the mess we are in and the Rating Agencies may have more influence on our future.

  • Comment number 34.

    This is something that I've been saying for months...it's an absurd situation given the rating agencies track record. Not one word of doubt has been raised against them...why would that be? Absolutely extraordinary.

  • Comment number 35.

    I think I have asked this very question before about the agencies. Do they do anything or than give rankings for countries and companies? How other than that do they raise cash to pay the staff?
    Maybe it is time for them all to be questioned and checked for doing both sides of the deal....

    And I harp back to this, they are American aren't they? Where most of the big money frauds are started.

  • Comment number 36.

    And today the US are selling billions of their treasuries. How coincidental that S&P (a US agency) downgrades European debt. Does anyone smell a rat?

  • Comment number 37.

    "What is extraordinary is that almost nothing has been done by governments, or central banks or regulators to break the de facto monopoly of S&P, Moodys and Fitch in the business of rating bonds".

    Why is this the case Robert? Why are these three relatively small private organisations operating with no opposition or competition? The ratings business must be pretty lucrative, so why aren't there more agencies offering a rating service? Why? Why? Why? Why? Why?

  • Comment number 38.

    Time for our brave leaders to pull the whole system down. Banks have too much power and no mandate.

  • Comment number 39.

    It's always struck me about managers, the bosses. They rsh our and buy the latest paperback management manual bestseller. Everyone buys into it because everyone else does.

    People all bought into the idea that the earth was flat despite the evidence for such an ever long time too! Some still do.

  • Comment number 40.

    It is a lot easier to assess a country's creditworthiness than the murky world of CDOs and the like.
    The rating agencies were paid by the issuers of the junk so it was in their interests to give them a triple A and charge a nice fee for doing so.
    The more complicated the instrument the better as the fee was higher. This junk was relatively puny compared to a country's finances.
    A country has to publish most of its finances and has to be reasonably honest so it can continue to issue bonds at a reasonable interest rate.
    So far as Greece is concerned, those with a long memory will recall certain S. American countries had financial probelms - we were told "a country will always be there so even unattractive economies will always be worth investing in."
    In the words of Bertie Wooster "Ha!" (OK I can't count)
    The market, quite rightly, doesn't trust the politicians, so looks to the rating agencies as an easy way to get a view on what bonds or governments are worth. As the market is so nervous price fluctuations will be overdone, and this is exacerbated by the speculators out to make a quick buck.
    Don't ask for more regulation, or for governments to set up a rating system as no one would trust it.
    Perhaps an answer would be for the IMF to publish its own assessment of government finances on a ratings basis. What is needed is a short but informed rating on which investors can rely.
    The rating agencies now have a rating similar to Greek bonds.

  • Comment number 41.



    Rating agencies as they stand appear simply there to provide a veneer of independence to the quality of judgement to bankers. A global rating agency, maybe run by the IMF the absolute lender of last resort should be in the driving seat, but some of its political baggage would need to be removed for true objective analysis to be achieved. National institutions would all simply give themselves and nationally important firms triple A rating in some instances.

    More competition maybe one answer but still fails to acknowledge the problem of opinion placed as fact without liability, confusion generated by broader ranges of the viability certain Assets/ firms/ countries.

    Independence and transparency are required in the analysis, and tighter rules on disclosure and reporting. Alongside this greater access to individuals to make smaller deposits one way or other at competitive rates able to utilise real and undisputed market data.

    Only this way will we be able to break the painful nexus of rating agencies as they currently stand, investment banks and vested interest, and through their extortionate charges banker bonuses.

  • Comment number 42.

    No one should listen to the ratings agencies, they are completely discredited. Setting aside the old caveat emptor principle for a moment that should have made the banks more cautious, the ratings agencies gave solid ratings to the CDO's that have created the banking crisis.
    These idiots should be held responsible for the guidance they gave the bankrupted the system

  • Comment number 43.

    "These ratings agencies have no particular credibility. In 2008 they were calling everything "Triple A," when things obviously were not.

    This is nothing other than closing the door, that had been allowed to flap in the wind for a few years, the horse long having left."

    Well, the ratings are based on best knowledge of the situation at the time.

    If I am owed £50,000 by various people to whom I have loaned money, and at the same time I have a credit card bill of £10,000, then I would not be unreasonable if I said that overall I am still worth £40,000.

    If, later on, it transpires that the people who owe me the £50,000 have all gone bankrupt and will never be able to pay me, then I am not only left with a £10,000 cerdit card bill, but I am also left with the knowledge that I poured £50,000 down the drain! But that doesn't mean my initial assessment was incorrect or lacking in credibility. It was based on the best assessment at the time.

  • Comment number 44.

    I particular liked one report in a national newspaper - EU wanted to regulate the rating agencies after the credit crunch because they considered the rating agencies had provided too weak a rating review and had too many conflicts of interest. EU, following the S&P downgrade, now want to regulate the rating agencies because, where Greece is concerned, they have provided too rigorous a review and are too independent of the govt (ie EU).

    Talk about trying to have it both ways.

    Lets face it, until Greece actually gets Germany to put its hand in its pocket rather than merely talking about it "subject to conditions", Greek bonds are junk. Shooting the messenger for stating the truth is not a good move.

    As it happens I do think rating agencies need some regulation mostly to do with conflicts of interest and the ability to verify how they have worked out a particular rating.

    The problem with rating is GIGO - they can only ever be as good as the information provided and in most cases will not even be that good because the information will need interpretation and the interpretation may be wrong (and in the case of the US housing market, spectacularly wrong). Ratings should only be a guide and there is no excuse for banks not doing their own due diligence

  • Comment number 45.

    To add to the general issue, there is also the problem that these rating agencies systematically underrate government debts, to the point that a number government agencies/AG's departments of various US states such as California, Ohio and Connecticut have sued them claiming billions in extra costs of bond insurance. John Quiggin has also posted on this topic in some detail, for example: http://crookedtimber.org/2008/10/20/discredited/

    Obviously the problem of replacing such agencies is credibility - if governments set up similar agencies they either will be tainted by politics, or at least there will be a suspicion they will be. Possibly you could create a department of the UN or the IMF to do it, but that seems likely to be just as much at risk of politics interfering with an truly independent judgement of risk.

  • Comment number 46.

    Good post.

    There is something distinctly dodgy about the way the ratings agencies have behaved; I suspect they are working to an agenda – or at least to somebody’s orders. I’ve not forgotten that Lehman Brothers was given an ‘A’ rating (by Standard and Poor) only a few days before Lehmans collapsed. The fact that the great and good seem to accept it is even more suspicious. A massive robbery has taken place and everybody is pretending it hasn’t happened.

  • Comment number 47.

    The rating agencies are a disaster on the make. It's nevertheless quite astonihing that we had to wait for the Greek crisis (european, eurozone, developed, etc, etc) to be able to read something abouth them on BBC. Not a single peep had been said before in onther moments of crisis and when their opinion clearly compounded on an already difficult situation. (asia, Russia, Mexico, Brazil, ASrgentina etc...) it's scandalous that such a power has been grented to those agencies, evem more when we consider the kind of economic assessment they perform to reach absolute conclusions on the state of the economy in different parts of the world. I was a witness to ane such an assessment and I must confess that I started praying for that poor country: process was superficial, officers involved subprime (to use an in word), etc etc... It's high time to review and chenge the damaging role those agenciess hace caused all around the world..

  • Comment number 48.

    S&P are pedlars of injurious fiction - just as responsible for our present financial distress as the USA
    sub-prime mortgage villains. Why should we in the UK play along with the stupendous lies of such daylight
    robbers? Better to ignore them and all those who believe that we must suffer a period of National austerity
    so as to balance some fictitious National Budget. They are those who wish to wipe out our painful progress
    towards a "Fairer Britain" - excuse the hollow laugh - by curtailing essential Public Services in favour of
    Private Ownership, allowing the privileged few to profit by the exploitation of the vast majority of our
    citizens.

  • Comment number 49.

    28. At 10:34am on 29 Apr 2010, verano wrote:

    > They can't decide willy-nilly whether to put their
    > corporation's or fund's money into the high rate bonds
    > if those bonds are risky (might never get paid back). So
    > they use a decision system, approved by their Management...

    We already know that the management of finance
    houses are boneheads, and this confirms it. You
    must do your own research, or you follow like sheep.

    Look, they have brains, like the rest of us - they just
    have to learn to use them.

  • Comment number 50.

    Good stuff.

    So the ratings agencies are really just a tool of the US/China axis in the undeclared trade war with Europe. Just as they were instrumental in priming the sub-prime dirty bomb placed under the big European banks. Right?

  • Comment number 51.

    Pity they didn't act faster with the banks which caused the recent recession. Can they be trusted?

  • Comment number 52.

    The Ratings agencies are history, out of vogue. One or two errors and confidence has gone. I said on these pages a few weeks ago that Greece would default, and they will. It is impossible for wealthy countries to bail out all the overborrowed poorly managed ones,there are too many. This has a great significance to the market as a whole not because Greek borrowings cannot be written off but because this default will signify the begining of the end of Government borrowing as we know it. The end, maybe over years, but still the end, of governments spending more than they raise from taxpayers.
    You read it here, remember this.

  • Comment number 53.

    Robert,

    From my experience, I am astounded that the issue of ratings agencies has not been addressed more seriously.

    Much of the confusion regarding the monoline backing of financial products of major institutions such as ML and LB between 06 and 08 might call into question the relationship between the banks and the ratings agencies. A situation where the rating of products can be cut so dramatically following further inspection seems rather farcical!

    What are your thoughts on this? Many seem to think legal action is a possibility.

  • Comment number 54.

    They serve a critical public function, but the crucial problem is not so much their private status, it is - as Robert says - their subservient relationship to their highly partial paymasters. Two measures would improve things no end:
    - mandate a wholly public and transparent evidence base and decision methodology;
    - pooled funding from the whole financial system out of the probably forthcoming Tobin or transaction tax.
    Additionally, it should be illegal for a financial institution to seek to influence a ratings agency, regarded as equally serious to nobbling a jury.

  • Comment number 55.

    Does it not make sense for government credit ratings to be given by an independent private company. If it were done by a government agency, they'd be under enormous pressure to give Greece a better rating and ease the crisis.
    Likewise, would it not make sense for private borrowers to be rating by a government agency who would be less inclined to fudge things purely to make a profit.

  • Comment number 56.

    Rather than complaining about the messenger, we should be more concerned with why our goverments have become so dependent on the bond market. All the rating agencies have done is confirm what has been widely known, Greece has taken on too much debt, with no way of repaying it. Rather then blaming the system (which is not perfect) Greece and the other nations should take responsibility for the mess they caused themselves. They were not forced to take the debt, they chose the easy way out and now have to face the consequences. It may be harsh but it's fair.

    If we learn to live within our means, we won't have the same problem. The only difference between Greece and Britain is we have years of good credit history. But people will realize that past credit history is not an accurate indicator of the future.

  • Comment number 57.

    Or, to paraphrase/miquote, who rates the rating agencies?

  • Comment number 58.

    I agree with #21. At 10:24am on 29 Apr 2010, LePlonk:
    Who is this Robert Peston, who made him so powerful and what checks are in place to ensure he is always objective and correct???

  • Comment number 59.

    Great blog! I've been wondering for some time why more has not been made of this issue.

    The ratings agencies are extremely powerful yet recent history would seem to suggest that they are either incompetent or worse still fraudsters. If they knew that the bundled derivatives were in fact a pile of poo but still gave them a gold plated, copper bottomed triple A rating then they were acting fraudulently. If they didn't, they were incompetent. Why should anyone have faith in their opinions? Why, in a country as litigious as the USA, has no none sued?

  • Comment number 60.

    I've decided I'll become a Rating Agency but I want to rate our financial institutions on how well they're supporting industry.

    So far they're all getting C minus.

  • Comment number 61.

    Rating Agencies may only rate based on the information supplied.

    They use vast amounts of information which is then run through their computer models and gives a rating accordingly. The criteria they base that on, I do not know for definite, but will include Debt To Income ratios.

    And this is why Greece, Spain, Portugal and others are being downgraded - the debt is high and the income is low and so they tell people that it is a riskier investment to make.

    It is that simple

  • Comment number 62.

    This is a very important topic but it omits a key point. The reason why these rating agencies have so much involvement in this evaluation process is that financial instruments of all types have become extremely complicated "products". The only real beneficiaries of such complexity are those who create and gamble on these products. If we followed the Paul Volcker principle and banned all derivatives and instruments that had no contribution to real economic activity then "hey presto"(excuse the pun)the rating agencies are no longer so omnipotent.

    It is also incorrect to say the rating agencies are paid by the finance houses. Ultimately the people who trade in these instruments pay as part of the margin that the issuing house builds in.

  • Comment number 63.

    National Governments could publish credit ratings of Investment Organisations. It would contribute to stability to know just how speculative each of these organisations is. Organisations with lower ratings could be removed from the list of permitted customers for Government debt.

    Or is that the kind of power reserved for the markets?

  • Comment number 64.

    I think Rating Agencies is the least of our worries.

    Let’s face it: All that has happened over the past 2½ years is a series of increasingly desperate attempts to keep the current amounts of debt (promises to pay) as good debt as opposed to bad debt.

    The volume of bad debt out there is enormous, the question is; can this be transferred to others who are good for it, thereby making it good debt.

    If it can’t we could be in for a currency crises.

  • Comment number 65.

    Oh how you have to laugh. Tipsters affecting the odds on the outcome of "Mornington Crescent"! They claim to know the outcome.
    Even more laughable when you realise that folk are actually taking notice of them.
    Self perpetuating nonsense.
    Wake up. It's only a game.

  • Comment number 66.

    Surely these ratings downgrades are a sign of things improving though Robert? At least their sounding us out about the horrific state of European debts instead of sleep walking us into an even bigger sovereign debt crisis? That would just be repeating the mistakes of the last few years. Now we just need some action on the UKs rating and perhaps the REAL economic recovery can begin (ie. one where its not built on an unsustainable debt mountain).

  • Comment number 67.

    Weren't these rating agencies the same people who gave AAA ratings to those - what did you call them at the time? - "Toxic Assets" that cause the banking crisis and all the rubbish that has come with it since? Am I missing something???

  • Comment number 68.

    I disagree with one sentence in this article:

    "If S&P doesn't create economic reality - which it doesn't - how can its assessment of that economic reality wreak such havoc?"

    S&P's assessments do change economic reality by making finance more or less expensive to the Nations in question. Their prophecies are self fulfilling.

  • Comment number 69.

    The rating agencies system is fundamentally flawed. They rate products but are paid by the owner of the product. It's like buying a house based on the survey the seller paid for - would you trust it? They are not impartial.
    Why not disband the agencies and create a new agency operated independently perhaps via the world bank. The new agency would be funded by a subscription to be paid by all banks/financial companies. It would be a sort of BBC for the stock market instead of what we currently have which is more like a cross between FOX News and Pravda.
    The new agency would then make its findings open to all subscribers. It would simply be a public utility service to the markets. It would enable the markets to function with access to information not corrupted by any other agendas.


    S&P are currently rated CCC- by Grace Bros Rating Agency (it's as valid as the other rating agencies)

    You're all doing very well !!!

  • Comment number 70.

    Perhaps nowadays we should say
    "Beware of Greeks bearing gilts"

    You're all doing very well !!

  • Comment number 71.

    Since the invention of ‘Shorting’ and indeed Spread-Betting, having knowledge of which week, this or next, a certain bond was to have it’s rating changed is extremely $Valuable information – expect to find mysterious strangers meeting with ratings agencies staff at lunch times and expect to see handkerchiefs being waved out of agency windows etc. Indeed since the discovery of Tungsten, a metal heavier (denser) than Gold, expect to discovery “gold bars“ in National Vaults to be a mix of Tungsten and Lead with Gold as a mere plating – such a brick could be made to have the same density as Gold and would costs pennies – indeed this is the answer to the Alchemists riddle “How to change Lead into Gold” – add Tungsten.
    Where there are high gains to be made from a little fiddle – then expect it – but then ask the question – is this a basic fault of our system ? – Real Wealth is fresh air, clean water, time to enjoy life, good food, security… such real wealth things are less amenable to being counterfeited.
    What is a Greek Bond anyway ?
    The Greek Government Create a bond by writing on a piece of paper
    “IOU 1 Million Euros in 3 years time”. A commercial bank then prints 800,000 Euros and gives this money to the Greek Government in exchange for the bond. The Greek Government then either pays it to retired police officers at 40 or teachers still working at 42. In three years time, if the Government is “good” it will have taxed workers and pensioners 800,000 Euro and it will go cap in hand to the Bank and say “Hello Mr Nice Bank Manager, We tried really hard to get 1 Million Euro to pay you back but we could only find 800,000 Euro in the Economy(because that's all there was so it's impossible to collect more)” Please please can we borrow another 200,000 Euro from you to pay your interest and can we have another 1 Million so we can keep the country going“.
    So the Bank Manager issues a bond for 1.2 Million Euro and collects 200,000 for his 'hard work'. If they are a ‘bad’ Government and they only collect 600,000 Euro then up goes their interest rates for next time.
    Robert asks the good question “how come some much power rests in the hands of some blokes in a suite in some little rating agency office ?"
    The same question needs to be asked about the banks themselves. Look at say BMW, they have top engineers, state of the art factories producing excellent products with loads of safety features and gadgets and yet their profits are pretty small compared to some bloke sitting in a room in a bank with some dusty ledgers - once creates cars, one creates money.
    Just what work have the banks done to earn 200,000 Euros in this example ?
    Greece and the UK.. and the rest of the World need to start using NEFS - Net Export Financial Simulation . In NEFS banking is seen as what it is –a bookkeeping service – and should be paid accordingly.

  • Comment number 72.

    If people don't like rating agency opinions, then they should ignore them! If everybody does this then the rating agencies would lose all power and influence. The rating agencies don't sell or buy in the markets, all they offer is opinions.

    If they keep something at AAA they're criticised for being to lenient, if they downgrade (like in Greece's case) they accused of having too much power. For all those who worry about the rating agency business model, Greece should be a perfect example of how rating agencies should operate. As a sovereign it doesn't pay for its rating, unlike companies and banks etc, which means all the conflicts of interests people complain about are not present, making the Greek sovereign rating even more credible.

    If the markets thought that S&P, Fitch or others are wrong, then the opportunity to lend to the Greek government at over 15% for 2 year money would be irresistable. This would drive down interest rates and the rating agencies would be shown to be wrong. Why doesn't this happen in this case? The markets normally take advantage of mispriced risk, and somebobdy makes a huge profit. Could it be that the rating agencies are right to point out Greece's weakness? Or should they keep quiet and pretend everything is AAA?

    As for most of the comments on the site, they display absolutely outrageous ignorance!!

    Like many, even those involved in the markets, most people simply do not understand what rating agencies try to do.

    Rating agencies do not try to predict default, they can’t, because it is impossible, which is why they don’t even try. Ask them, they will tell you this themselves.

    They perform a holistic analysis (of cashflow, leverage, capital etc) and assign the most appropriate rating based on their definitions: a company/country considered ‘exceptionally strong’ would be AAA for example, ‘very strong’ would be AA, strong would ‘A’, ‘adequate’ is BBB, ‘weak’ is BB, very weak’ is B etc.

    On average, over time the cumulative default experience of each category can be analysed; for example, on average 0.5% (say) of single A category ratings default within one year.

    Does this mean that if an A rated company defaults overnight then the rating agency has failed? No! Does it mean that the rating agency boobed because it didn’t downgrade to junk status months or years ago? No!

    Even if five single A rated countries/companies default overnight (or within 12 months) so long as the rating agency has about another 1000 single A ratings around the world that don’t default, then it is performing in line with expectations based on historical data. (the 0.5% number given above)

    Does this mean then that if not 5 but 50 of its 1000 single A rated companies / countries default within 12 months the rating agency has failed? No! Because for the next 9 years, there might be no defaults, meaning that the average one year default rate for that sample for the period is still the 0.5% that you’d expect.

    What Robert and many others seem to imply is that if a company or country has a high rating then it shouldn’t default. In essence, they are saying that the default probability for AAA, AA, A (and may be even BBB) should all, ideally, be zero. But if that were the case, then that WOULD be wrong. If the the default experience is the same for all those rating categories, then it implies that the ratings should also all have been the same, and not assigned at different levels. i.e. implying that the ideal is a binary ‘default’ ‘no default’ prediction, yet this is impossible and as stated above, precisely what the rating agencies say they do not (and cannot do).

    This is what ratings fundamentally mean; they are a relative ranking of risk. Assigning a rating level of AA doesn’t mean that there will be no defaults, it means that on average, over time there will be more defaults than in the AAA category, but less than in the A category which in turn will be less than the BBB category, and so on.

    So remember, a default, even if the rating is or has recently been at a high level, is not necessarily bad!
    In fact it is essential if ratings are to perform properly.

    It is amazing how few people, including those in the markets, banks and regulators misunderstand this fundamental concept.

  • Comment number 73.

    There's nothing democratic about rating agencies bringing down economies.

    These agencies, similar to some high octane bankers and traders, can't be allowed to trample in packs like this, bringing down economies, countries and people's pensions and jobs.

    They can't 'big up' a financial product - make shed loads - and then 'throw in the towel' because when they entered the ring, knew they will make more, by leaving the bruised and bleeding behind with the 'purse' - worth considerably less than theirs?

  • Comment number 74.

    An excellent article Mr Preston. While, as a Greek, I am appalled by the inefficiencies and endemic corruption of the Greek financial system and think that this crisis is an excellent, and perhaps final, opportunity for my country to make some fundamental and long needed changes, I am horrified by the power vested to these organisations to destroy sovereign nations.
    This should be a wake up call not only for countries with similar difficulties, but for the Eurozone as well to build mechanisms that will in future pro actively predict and deal with such crises before they spread.
    Those of us who believe in the European ideal think that now is the time for further political and economic integration. If those had been achieved, Greece would not have been able to cook the books and these credit agencies wouldn't have the power to create such havoc.

  • Comment number 75.

    What a hypocrite and one with a short memory.read blog 21

  • Comment number 76.

    If the ECB undertakes QE and buys second hand Greek debt, thereby allowing banks to buy newly issued Greek debt, it will avoid breaching section 104 of the Maastricht Treat. And keep Greece afloat financially.

    However the Greeks would need a rate of interest, less than or equal to German Bonds, to give them any hope of ever repaying it. Now the Portuguese may also need the same help, along with the Spanish etc.

    And assuming what the ECB does for one country, it will have to do for another. Then Euro would be watered down and inflation take hold thereby affecting those nations (people) who have been more prudent.

    On the other hand Euro nations can lend Greece, and then Portugal, and possible Spain etc. money to keep them afloat. But in so doing they will likely raise the interest rate on their own debt (as they will become deeper in debt).


    If the ECB and BOE are both printing money (and I reckon the BOE will shortly after the election), then there is the potential for a currency crisis.

    The plain truth would appear to be that there are two many promises to pay (debt) which in reality can never be paid without printing the money to pay them.

    Therefore, it will presumably end up with either sovereign defaults or printing money on a very large scale, which in essence is a currency crisis.

    I received a bank statement today (for a cash ISA account). The rate of interest being pain annually was one tenth of one percent (0.1%).

    The amount of gold that could have been bought with the money held in that account has dropped by around 45% in two years.

    For me at least, that equates to a currency crisis.

  • Comment number 77.

    Wasn't S&P the rating agency that supported the banking scheme in the over-valuation of the housing investments, funded by an empty box? They have proven their dishonesty and that they are simply an arm of the banks and investment firms. They were trusted and betrayed that trust. Think of them as the frontman for a criminal organization.

  • Comment number 78.

    Since October, I have become increasingly aware that the three credit agencies have been manipulating the Eurozone situation. They have become so powerful because investors and speculators pay attention to their ratings! For example, the statements by Papandreiaou declaring the deficits of the Greek government were welcomed by the credit agencies with downgrading and no attempt to acknowledge the honesty of the new government. Since then there has followed a sequence of rumour, assessment,downgrade, with panic. The Greek finance minister asserted the recovery programme would work. The agencies remarked that the programme of recovery would not work. They talked about the negative future for Greece, even though there was no shortage of demand for Greek debt. Papaconstantinou stated Greece would not need a bail out. The agencies' observations about any bailout unsettled the markets and led to downgrades. Later comments about bankruptcy/default led to increasing interest rates. The Greek team observed that they wanted back up, declarations of support. But it was clear that the agencies were looking for the markets to stop buying Greek debt. So they downgraded and declared the bonds junk. This action made it certain that sales of Greek bonds would stop. This action made it certain that uncertainty would shake the euro-club. It has become clear that these ratings agencies are ruling the current financial position of Greece, and that of the eurozone. They are playing a political game as well financial: one has to wonder who are the key players? Are they agents of the IMF? ECB? Bank of England? the Fed? the World Bank? DeutscheBank?
    It can be observed that by making it impossible to buy Greek bonds, the agencies are forcing the situation so that the German government supports the EU loans at 5%!

  • Comment number 79.

    The 'global financial crisis' was the creation of the financial sector - an industry now revealed as utterly lacking in moral compass or skill (beyond the ability to tick boxes in the vast abstract computer game we call 'The Markets').

    The Greek government may have overstretched itself, of course. But it would have been thoroughly encouraged in this by the financial sector. Just as the vast majority of Western citizens were encouraged, over the last 20 years, to join a culture founded on debt by the consumer-facing branches of the financial sector.

    Then, when something goes wrong, the credit agencies (who are funded by the financial sector, and have only its interests at heart) arbitrarily cuts both individuals and countries out of the loop. Their debt, it transpires, has become junk; it's all their fault for allowing themselves to get into debt; and loans must needs be forthwith renegotiated at punitive interest rates.

    The downward spiral begins. It's no longer a matter of finding ways to live within your income - it's about survival. For individuals, this can mean losing all the life security that the financial industry used as a lure to create the debt in the first place. For countries, it lets in endemic poverty, extremism and war.

    It's that serious. Which is why, since this news was announced, I've found myself inwardly screaming 'who the hell do Standard and Poor (or Experian or Equifax come to that) think they are, making financial judgements on the victims of financial excess, when the industry in which they loom so large is fundamentally respnsible for creating that excess in the first place?'

  • Comment number 80.

    Can't seem to work myself up into a lather over this one I'm afraid.

  • Comment number 81.

    ** message from banker **

    I'm afraid the explanation is far more mundane that Mr. Peston's story suggests. The rating agencies in my experience generally try to do their job as best they can and diligently (to the extent of their skills). As is usual amongst you bloggers (including you, Mr. Peston!), I suspect those with the conspiracy theories here have never worked with the rating agencies.

    I have worked with them. I found they tried their best and in some situations infuriated bankers and their clients by changing their minds in the middle of a deal, lowering ratings even when their competing rating agencies did not.

    I'm sorry to be rude, but the reason they failed to predict the crisis is they aren't that bright. I have never met a ratings person with an original perspective. The rating agencies are a lagging representation of reality. By finance sector standards, they're not that well paid, not particularly hard working and not the sharpest tools in the box. I would simply advise anyone who receives one to put a ratings report in the dustbin, as you will learn either nothing, or a negative amount from reading it.

  • Comment number 82.

    I'm going to set up a new rating agency called Average and Rubbish.

  • Comment number 83.

    Jacques Cartier,

    I agree with you. A lot of these firms were worse than irrelevant. Their failure is the precisely the result of putting post graduate students with quantitative backgrounds into the real world, building models that don't work. Such individuals would be better off doing some low-IQ, mechanical database work sitting in Cern or something...

  • Comment number 84.

    Is Greece so short of money it can't pay S&P for a better rating ?

  • Comment number 85.

    At its core this is a question of "Truth".

    At the time of Greek entry to the Eurozone , no one "Believed" that the dubious mix of grey and utterly black earnings in their published figures was a "True and Accurate" account.

    The economy of Italy is always afforded more lee way as it is recognised that up to one third of the countries economy is within the Black sector and therefore unreported but none the less fiscally in existence.

    The EU has never in my memory been able to have its accounts signed off due to highlty significant fraud and misreporting.

    The huge world of NGO's and aid programmes serve as a world wide funnel for money laundering and the disposition of despot's corrupt gains while the Swiss have been the covert handlers of untold billions of the Trillion dollar world wide drugs trade.

    Insider trading is so easy and so widespread as to very rarely attract either comment or even less often prosecution.

    The ratings agencies do exactly the same as the banks own analysts and have on balance very little more information than those private dicks apart from the titbits provided by the central government agencies trying to put their best face forward.

    The AAA ratings attributed to the sub prime were an out and out gamble based soley on the world wide suspension of belief that said "Property is a One Way Bet", if property values continued FOREVER to rise at 20% per annum then ALL property based CDO'S were defacto AAA as their underlying securities were always going to be worth more than the sum secured.

    The Total illogic of that hardly needs pointing out to a 3 year old.

    The emeritus professor of economics at LSE has stated many times that the transparency and dynamics of the UK economy, the known interest rates and length of securities issued and the known markets for them means that the UK issues are indeed by any other countries standards comparatively AAA, yet political and speculative motives continue to lob in rumours of UK downgrade.

    As in Politics the "Truth" as far as it can ever be definitively agreed is out there, just everyone has their own versions of it and reasons for either ignoring it or concealing it.

    The ratings agencies are and always have been redundant, but serve like the Guinness Book of Records as self appointed arbitors of claimed achievements or facts.

  • Comment number 86.

    # 61. At 12:55pm on 29 Apr 2010, yam yzf wrote:

    > And this is why Greece, Spain, Portugal and others are
    > being downgraded - the debt is high and the income is
    > low and so they tell people that it is a riskier investment
    > to make. It is that simple

    In a good system (i.e. one that works) underlying parameters
    would change slowly - in the long run, markets are a weighing
    machine.

    In a poor system (i.e. one that lurches from one thing to the
    other as the merchants of greed attempt to get money for nothing)
    the underlying parameters change quickly - in the short term, markets are a voting machine.

    The answer is to make speculators pay for the effects of
    speculation - a Tobin tax. If they want to bet, they can
    go to Chester racecourse and have a nice day out at the
    same time.

  • Comment number 87.

    Interesting blog post but two points.

    1. You say "If S&P doesn't create economic reality - which it doesn't". But it does. Economic 'reality' doesn't just sit there waiting to be introduced it is created through the interpretation of a complex and confusing world by humans describing it. My description is not powerful but an interpretation by powerful actors, who other believe believe, like S&P or the IMF or the Bank of England create the reality in which the rest of us live.

    2. Ratings agencies are just one examples, but a powerful one, of the agencies that ascribe quality judgements to bits of our world. In this they are no different to Ofsted or NICE or high court judges. We delegate authority to these bodies to make judgements on our behalf and then close down 'failing schools' or get prescribed 'effective medicines'. These judgements rest in the way the world is perceived not in the world itself (if it were part of the world there would not be such arguments over these judgements). Judgement is inherent in the world the anti-democratic delegation of judgement is a feature of of a globalised and marketised world.

  • Comment number 88.

    It is a traditional sport to 'shoot the messenger' but it is only played when the message is both accurate and unwelcome. When the message is inaccurate but welcome, criticism is generally weak and late.

  • Comment number 89.

    These are the credit ratings agencies that failed to understand that sub prime mortgages are bad news....unless someone is paying your fees to say otherwise!

    Now they preach to the world that Greece debt is junk status....how can we believe that when they've clearly demonstrated that they don't have a clue about what they're talking about.

    To now have the UK mentioned as having problems similar to Greece is outrageous....much of our debt has been run up bailing out the banks!

    We could reduce our debt at a stroke....just demand from the banks all the money plus interest we the taxpayers committed in saving their skins.
    If they're so smart let them borrow the money on the open market....obviously they're not or they'd have done that....instead they'll soak us for our tax monies and then criticise the goverment for not doing enough in reducing the deficit.

    Time for them to get off the backs of the Europeans or cough up the money we lent!

  • Comment number 90.

    S&P's are only raising the interest rate on the loans.

    They're trying to force a default.

    They're acting in this way now because the war by Wall Street terrorists versuses the rest of the world in full swing.

    They're making a display of catch me if you can, business as usual, staying unaffected, unchanged since before the crisis, that they can and will continue to siphon off cash from the poor to pay themselves...

    Wasn't quite the reverse rating tripleA for CDO's was it?

    Same result.

    Same destruction.

    Same bonuses.

    The trillion dollar question: will government remain spineless or force a regime change?

    "If they wanna fight..."

  • Comment number 91.

    Robert, I don't think these CRAs are as powerful as you suggest. At the end of the day, bond prices are moved by supply and demand. Observation shows that bond prices move to a significant degree ahead of (i.e. anticipating) a change in rating. This is because there are significant numbers of smart bond portfolio managers who are doing their own fundamental analysis and making timely judgments. As well as these smart bond vigilantes, there are admittedly also a bunch of bond manager "sheep" who follow the CRAs... and so make them look influential ... in reality though, most of the price movement happens before the CRAs pronounce! Honestly, do we need a CRA to tell us the difference between Germany and Greece???

  • Comment number 92.

    Please, Robert, would you not treat us all as idiots? What drives the downgrade is the MARKET - it determined that the same 20 year Greek Gov't bond that was trading around 3.25% two weeks ago traded at almost 9% on Monday. S&P only acknowledged the reality that these are junk bond prices. S&P & Moody's have lots to answer for on their past performance on CDOs, CLOs & Mortgage Backed bond ratings but this is not their fault. Lay it where you shold at the door of the EU and the Greek/Spanish/Portugese Gov'ts who wanted the Euro so badly that they played sill buggers with economic and fiscal numbers and forecasts to great the myth of the "strong" unified currency. Would that we had the days of the Deutsche Mark back again! Save Sterling!

  • Comment number 93.

    # 81. At 2:48pm on 29 Apr 2010, Barry wrote:

    > ** message from banker **
    > the reason they failed to predict the crisis is
    > they aren't that bright.

    And there you have it. Cheers Barry, at last I know
    I was right all along.


  • Comment number 94.

    There are problems with private-sector ratings determining eligibility for the operations of the central banks, including the Bank of England. But even worse is RP's proposal:

    > Wouldn't it make sense for the Bank of England, the European Central Bank, the FSA, the SEC and so on to find other ways to judge the quality of the bonds that underpin their evaluations of banks' financial robustness.

    So imagine that the BoE changes the rating (or equivalent) of the bonds of some country, and that this change is downwards. What happens next? That government would summons our ambassador for some form of dressing down, and other consequences might follow. If this is a central-Asian 'stan, it could be the withdrawal of permission for British military to use an American base there. Another country might switch side to help Japan in a whaling vote; or any one of many other forms of trouble. This is a cost faced by the UK.

    Then, a few years later, the economy of that country takes another lurch downwards, but this time the BoE does nothing. What would happen next? What may well happen is that a journalist by the name of Robert Peston would say that the judgement of the BoE has been swayed by the previous diplomatic trouble, and hence the BoE cannot be trusted.

    So, the RP solution would leave us paying a diplomatic price to gain ratings that RP deems untrustworthy. RP: please state clearly whether you really think this an improvement.

  • Comment number 95.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 96.

    Finally an article that touches on this subject. I really hope this article generates ALOT of heat and public debate because I think anyone with common sense would realise how ludicrous it is that a rating's agency can bring down a country economically. Sure Greece's finances were no fairy tale but junk-status? How do we know whether or not someone at S&P didn't short on the Greece stock market before shorting was frozen and is now profiting greatly? Maybe S&P and other such rating agency's should be assimilated into the IMF/World Bank or be run by other such world institutions related to the UN.

  • Comment number 97.

    This blog could be written by Gordon Brown - blame somebody else when something goes wrong. Greece fiddled its figures and deserves the downgrade. So too the UK, though I guess they won't upset a big customer during an election, that wouldn't do their business much good.

    "
    But it is nonetheless extraordinary that some relatively simple economic research by a private-sector organisation can have quite such an impact.
    "
    Nonsence, the impact is due to governments borrowing too much money. Have a look at Labour, the party you know and love so much.

  • Comment number 98.

    20. At 10:22am on 29 Apr 2010, shireblogger wrote:

    "The Debt Management Office often say the Credit Rating Agencies are a lagging, not leading, indicator of market sentiment. Bond pricing, they say, has already been adjusted before the Rating Agencies give their opinions."

    Oh yeah - the market is efficient is it? - well how come I (and many others) knew Greece was going to default back in early 2009 - but it's taken until November 2009 before the bond markets 'priced it in'.

    They are all lagging indicators - markets are reactionary - I mean look at the 7% increase in the Greek Stock market today because the EU have 'made noises' about a bailout being confirmed soon. Haven't these clever Bond holders realised this train only has one stop - default - and they're still getting on in droves......the plums - oh wait a minute, they're using our money to make these bad assumptions - what do they care???

  • Comment number 99.

    Was it Roosevelt that first voiced fears that the Military-Industrial complex that had arisen out of WW11 was now more powerful than the government of the USA and therefore EVERYBODY else?

    Then they shipped INDUSTRY to the Far East and it became the

    MILITARY-OIL complex

    Now if one looks where the Multi Billion profits or Budgets are its the MILITARY-OIL-FINANCIAL nexus.

    Do we really think that any of us or any of our governments stand a chance against their TRILLIONS?

    WE are only needed as consumers. They rule the world.

    I would not be too worried about this personally if it were not for the fact that they (The Leaders of these three) are SO patently stupid.

  • Comment number 100.

    "Wouldn't it make sense for the Bank of England, the European Central Bank, the FSA, the SEC and so on to find other ways to judge the quality of the bonds that underpin their evaluations of banks' financial robustness."

    There already many are other ways:

    - crystals
    - astrology
    - tea leaves
    - tarrot cards
    - the "wise woman"

    These may or may not work any better. Governments (and private investors) are not actually required to believe the ratings agencies. But it doesn't seem too far fetched to think that S&P will be at least detectably more accurate than other sources.

    For your suggestion to make sense, you'd have to have some evidence that governments are able to conjure up a better alternative source of credit rating information. I seriously doubt they are. In the worst case it's essentially wild prognostication based on hearsay. If no one is gossiping, the agencies have nothing to go on, so they just say "Everything seems to be ticketyboo as far as we can see at this point".

    The irony of your bringing up this point in relation to this news is that this is one situation where we don't need a rating agency to tell us the truth. As you say, the facts are freely available already. The jury is in: the Greek government borrowed and spent a huge amount and bankrupted itself. A lesson for all governments, not least the UK which could very easily end up in the same boat in a few years time.

 

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