Rating Rhetoric

This post is by Marie Cairney, an Associate Director in our Financial and Professional Services team:

Only a few years ago rating agencies were being lambasted by investors, financial institutions and governments alike for their role in the unholy financial mess of 2007-2009. Prior to the crisis, trust in the Big Three agencies ratings on corporates, financial institutions and mortgage-related securities was high. This created a world where investment decisions were more or less made based on a couple of letters of the alphabet. Credit crunch finger-pointing blamed institutionalised ‘bad calls’ on the part of rating agencies as a major factor precipitating the crash. Blaming someone else for allowing you to do something that you knew was inherently stupid never looks good but a lack of transparency and competition in the ratings industry made the agencies a valuable commodity in the scapegoat market and let’s face it, they did get it wrong even if it was along with everybody else.

Ratings agencies assigned 'AAA' designations to exotic securities pre-2007, which led to a bubble of investor confidence in these products (Image: CNBC)

Fast forward five years and rating agencies are still here and still apparently creating mayhem; this time in the sovereign debt markets. Perhaps determined not to get it wrong again, they are all over Eurozone and US deficits and debt. Instead of building faux-investor confidence though, they are, according to beleaguered country governments, wrecking it. Damned if you do, damned if you don’t one might think.  “It wasn’t me, it was them” seems to have been replaced by “It’s not fair” as the key criticism of rating agencies in the global financial playground, with successive Prime Ministers, Presidents, and Chancellors publicly livid with their new grades.

Apart from the UK that is – we by comparison seem to be delighted. For political propagandists a downgrade to negative seems to have been manna from heaven. Akin to a hypochondriac saying to his doctor, “I told you I was dying”, George Osborne is positioning Moody’s downgrade as a renewed wake-up call which is doing us all a favour and further supporting the now pervasive gloom and his proposed cure. Meanwhile Ed Balls also jumps on the downgrade as an “I told you so” opportunity; but chooses to ignore the detail of Moody’s prognosis and instead concentrates on the visible symptoms; i.e. a lack of growth. Knowing that he doesn’t have an alternative cure for the disease, Balls seems to be saying that if had we applied the financial stimulus equivalent of Savlon a couple of years back, we might not be so itchy today. Still on our deathbeds, but not quite so itchy.

Moody's threatened to downgrade the UK's debt last night, though politicians seem to have taken the news rather well (Image: IndiaVision.com)

What can we conclude from all this? Well, one sovereign’s financial ruin seems to be another’s call to action. But love them or hate them, right or wrong; rating agencies appear to be here to stay, here to influence and here to be heard. But only if we listen to them…now there’s a thought; collective deafness…

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