To fight the North American ones, more and more politicians are suggesting the creation of an European rating agency. It seems that they are not aware of the several dozens of rating agencies that are spread around the world, including Portugal.
Anyway, if there is going to be a new European credit rating agency, I propose that this new rating agency uses the Greek alphabet instead of Latin. Therefore, instead of aaa we would have ααα, or βββ instead of bbb, and so on and so forth.
Misquoting Kennedy, one would say: “Two thousand years ago the proudest boast was civis Romanus sum. Today, in the world of freedom, the proudest boast is 'Ich bin ein Grieche!'... All free men, wherever they may live, are citizens of Greece, and, therefore, as a free man, I take pride in the words 'Ich bin ein Grieche!'”
The notion that a public European rating agency would solve all our problems is obviously appealing, considering some people seem to enjoy the notion that we get bad ratings because the big agencies rating us are «american», and therefore evil.
ReplyDeleteWe need good decision-making at European level, including better procedures (which, I think, means we need a more federal Europe), and we need to actually implement the reform programme we've pledged to implement. Good intentions aren't enough.
I wonder how could we have a credibility rating for rating agencies...
ReplyDelete(I subscribe the idea of a federal Europe)
One thing is for sure, there is no credibility in them rating each other, though it was rather hilarious to watch.
ReplyDeleteOn a side note, a Euro credit rating agency somewhat makes sense in present times given the bulk of Euro nation's debt are owed to each other; however, anybody standing outside of Europe with exposure to Euro sovereign debt will consider the advice of a Euro rating agency giving rating opinions on Euro nations as a conflict of interest.
Bottom line, investors will «rate» rating agencies when they decide whether or not to use their data.
ReplyDeleteCertain institutional investors, however, have a statutory and maybe even legal requirement to use that data. That helps promote a pro-cyclical effect in a market that's already bubbly.
Finally, any agency that's set up would need to be independent, so as to be credible. After all, that's how it'd be able to compete globally, which would, I imagine, also be its goal. It could only be a way to keep «American» agencies «honest» if it were actual competition to them.
That said, a Euro credit rating agency would be accused of being Germany's pawn in an economic war the moment it did something that Southern countries didn't like, I think. It'd become a political piñata, especially if it's set up for political reasons.
Very good points Joao.
ReplyDeleteI am no sympathetic to the rating agencies but I would really like to know who advises Merkel and Rutte.
ReplyDeleteThe ECB made very clear, months ago, that insisting on a private participation would have negative consequences. Juergen Stark in June: "Participation of private banks in extending fresh bailout for Greece must be made voluntary if the participation is not fully voluntary, it would have negative effects on financial markets"
Q.E.D.
The problem with the current system of rating agencies, is that they have been able over time to corner the market for themselves and create a oligopoly in a typical example of what George Stigler outlined in his regulatory capture theory. Rating agencies have managed to lobby regulators to create a system by which investors such as pension funds, insurers, banks, etc, can only invest in securities that are rated by a Nationally Recognized Statistical Rating Organization. By 2003 there were only three agencies that fell into this category although recently more have been added. Not only have they managed to corner the market but they also managed to create a protectionist measure: for a US investor to invest in any security, domestic or international, it has to be rated by a Nationally Recognized Statistical Rating Organization and guess what? They are all american. Regulators have unintentionally created a haven for rating agencies which have used the coercive powers of government to force the private market to use their services.
ReplyDelete