Shadow Dancing with Debt: The Credit Ratings Agencies Must Be Reformed

By Glenn Ashton · 25 Nov 2014

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Picture: Consilium
Picture: Consilium

South African economic prospects have recently been downgraded, yet again, by major credit ratings agencies (CRA’s). The nation’s sovereign rating now stands just above junk bond status. Major parastatals like Eskom and Sanral have also been knocked by ratings declines because of poor planning and investment decisions. Similarly, South Africa’s highly regarded and robust banking system has been marked down by the CRA’s, precipitated by the recent blowback of African Bank’s questionable lending practices.

The fact is that these agencies have major impacts on investment decisions across the economic landscape. Consequently the inherent lack in transparency and accountability of the big three CRA’s – Standard and Poor, Fitch and Moody’s – is unacceptable.

While there are few arguments that South Africa’s economy is improving, the larger question about the massive influence of the rating agencies on international markets remains. Their welfare is inescapably linked to private capital while their decisions have massive economic and political repercussions.

Many institutions have reviewed the role of CRA’s over the years. Various UN bodies have examined them, both before the 2009 financial sector meltdown – which the ratings agencies not only failed to predict but which they arguably contributed to by failing to read obvious signs of speculation and market manipulation – to more recent interrogation which highlighted concerns around their lack of transparency and objectivity.

There remains profound ambivalence about their lack of independence. There is pressure to reform the malign influence of these undemocratic, unelected entities on international capital markets and especially to correct the inherent bias against the global south and toward first world financial institutions.

Turkey has a long record of objecting to the influence of the vagaries of these institutions. Premier Tayyip Erdogan suggested that a ratings downgrade by Fitch was politically rather than economically inspired and informed.

More sinister is the ability of the agencies to exploit inherent vulnerabilities in the economic system through their close alliances in the occult world of the casino economy. They are capable of essentially gaming the global financial system as inside traders. And just how have they failed to predict every single major financial crisis for the past two decades?

There was a degree of schadenfreude when various EU institutions howled about the downgrading of Greece, Ireland and Portugal to junk status by the big three after the 2009 financial meltdown, while equally speculative calls by the agencies on developing nations like Argentina, Ukraine and now South Africa are ignored. After all, the erosion of southern institutions stands to benefit first world capital markets by reducing the value of essential commodities like land, metals, energy and labour.

These inconsistencies highlight what essentially amounts to institutionalised manipulation of the market system by the dominant economic players. Already vulnerable nations and institutions are further marginalised and undermined. The agencies are ideally situated to readily initiate runs against currencies, undermine shareholder value and play the longs and shorts of arbitrage.

The Agencies themselves suggest that they, like the alternatives to democracy, are the least bad option. However this perspective is not only self-serving but unconvincing. The present reality is that the dominance of three massive financial institutions, joined at the hip to the dominant capitalist system, is incapable of independent reflection and assessment.

Several alternatives have been raised. Those closest to the system suggest that multilateral agencies such as the World Bank or the OECD act as independent arbitrators. However, such an approach is simply replacing one flawed system with another.

Another possibly more realistic option, called the Universal Rating Group, has already been put into play by a curious alliance of joint Chinese, Russian and US interests. This sort of option could be extended to a BRICS-aligned agency, which could be a more independent and attractive option.

Whatever the case, the existing CRA’s clearly fail to meet the requirements of a rapidly changing world, one which needs to evolve in order to shift to a more adaptable and equitable global economic model. The impetus toward economic and social transition is impeded by the power and vested interests of these agencies, combined with their failure to either provide reliable prediction or suitable adaptive strategies.

Ashton is a writer and researcher working in civil society. Some of his work can be viewed at Ekogaia - Writing for a Better World. Follow him on Twitter @ekogaia.

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CRA Not Credible

Excellent article Glenn. I am not an economist, but there is a clear mismatch between countries like South Africa that are providing the commodities for this consumer driven world and their credit ratings. Perhaps it keeps us as a poor supplier of raw materials while investment for beneficiation happens in countries with a higher (artificial) credit rating?

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