Struan Stevenson: We should be wary of credit rating agencies
Thursday, 20 October 2011
Struan Stevenson: We should be wary of credit rating agenciesLike weather forecasters, the major credit rating agencies (CRAs) claim to have the ability to tell us what the future may hold. ut painful experience tells us that, like weather forecasters, they are often mistaken in their interpretation of the facts. Or worse still, they tell us to pack an umbrella when we’re already soaked through.
This weekend’s eurozone crisis summit is designed to guarantee a rescue fund that will give a much-needed dose of confidence to entire economies teetering on the brink. Yet, amid rumour that Moody’s may unilaterally downgrade France’s cherished AAA status, we must be wary of the potentially malign influence of these agencies on the deal’s success.
Earlier this month, we saw that despite Italy’s low current borrowing needs and low private-sector debt levels, Moody’s decided to downgrade its credit rating – despite the agency’s own admission that the chances of an Italian sovereign debt default were “remote”.
There are, of course, perfectly valid reasons for such pronouncements by the CRAs. But there is something fundamentally wrong with a system that allows them directly to influence the confidence of investors and the success of political summits by manipulating the ratings of governments and companies alike, based on a subjective reading of what those very investors might possibly be thinking now or in the future.
It seems to me that the stakes right now are just too high for these unaccountable CRAs to be taken at face value each and every time they issue the results of a negative review.
Their pronouncements merely serve to increase interest rates while downgrading confidence, not just in the financial markets, but in a wider economy that is already pitifully short of confidence.
We shouldn’t let the CRAs determine our response to the current financial crisis, any more than we should let weather forecasters tell us where to build flood defences on a rainy day. After all, where were they in 2008 when all of this started?
• Struan Stevenson is a Conservative MEP for Scotland