Credit Rating Agencies Dictate Terms to Parliaments and Governments

As Oscar Giannino [a well-known Italian financial commentator, ed.] wrote in this very newspaper, I also found the first reaction to the downgrading of  the debt issuance of several European Governments very irritating.

The second reaction, more meditated, was an even deeper irritation. In fact, I believe that it is now time to introduce limits, once and for all, to the power of rating agencies, a power that now outweighs that of Nations and International Institutions.

It is true, as many economists have said and as the German treasury minister repeated yesterday, that the actual impact of the decisions taken by the agencies should not be overestimated, but this is just wishful thinking.

When treasury bond interest rates skyrocket, credit capacity of banks is cut, and stock markets are slaughtered, it is difficult to continue believing that the power of rating agencies is overestimated.

Their decisions, in fact, endanger the work of governments and the sacrifices of tens or hundreds of million of people.

In past months, rating agencies often had a more important role than that exercised by parliaments and governments, and their actions even more often neutralized the decisions taken by those government institutions.

It is not my intention to make the point that agencies’ choices of timing and procedure are targeted to exalt their fairness of judgment, and thus allow us to forget the excellent ratings given to Enron, Lehman Brothers and Parmalat on the eve of their default. Nevertheless, we cannot allow our future and the future of democratic institutions to increasingly be delegated to structures that not only are fallible by definition, but also pursue the interests of their shareholders, managers and stakeholders, correct as that may be.

Those interests, despite being governed by severe rules and procedures, could hardly be considered universal.

According to Mario Draghi, the influence of these agencies should be reduced, and a strong regulatory framework should be defined to control their activity.

The first step is to break up the exclusive power of the three companies that dominate the market, adding new players of any origin, be they European, Chinese or from elsewhere.

This move alone, however, is not sufficient. If the capacity to evaluate the  financial health of companies can be delegated to the exclusive power of commercial rating agencies, the same cannot happen for nations, where these judgments have an impact on the future of entire countries, indeed the entire planet.

Therefore, it is necessary to have an international authority that can, at a minimum, place its own rating next to the ones of the other agencies. In other words, the International Monetary Fund should adopt the power not only to assess the economic policies of the different countries, but also, consequently, to express a real rating on the reliability of their debt.

This rating issue has become a problem of sovereignty, and international institutions must ensure that this power is used in a more balanced way. It is unacceptable to hear that the Italian government has done remarkable things, but its future political strength is questionable and so, as a consequence, investors had better stay away from the Italian government bond. It is also astonishing that, soon after criticizing the activity of the rating agencies, the President of the Group of the Euro Area Finance Ministers hopes that the Safety Net fund manages to maintain its triple A.

The madness that we have seen in the last few months may at least have had two potential positive consequences for Italy, although certainly not wanted.

The first is that the Euro finally lost some of its value against the dollar, supporting European exports, exports on which we have to rely as we wait for the future awakening of the domestic Italian and European demand.

The second is that France has now been forced to admit that it is under attack as well, not just the weaker European countries. I don’t think that “ a trouble shared, is a trouble halved” , but I do hope that France finally understands that its role is not to build a weak and insufficient counterweight to Germany, but to become the leading actor of a new and stronger relationship among European countries, and to persuade Germany that the end of the Euro would cause the decline of German prosperity along with it.

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