Peter Williams, accountant and journalist, explores the contrast between the impassioned scapegoating of the ratings agencies during the onset of the financial crisis with the meek acceptance of the recent UK sovereign downgrade.
Credit-rating agencies have proven remarkably capable of withstanding the opprobrium of politicians. At the start of the financial crisis, politicians pilloried the agencies, and warned of dire consequences for their part in the crisis. But the tough talk has barely touched the work and the output of the rating agencies.
Perhaps inevitably, the discomfort of a UK sovereign downgrade from its coveted AAA status by the rating agencies has been seen partly through the prism of the political damage inflicted on UK chancellor George Osborne. But he is not alone: the UK has merely followed in the footsteps of the US and France in 2011 and 2012. A few weeks before Moody’s delivered its ratings verdict on the UK economy – and some would say on the chancellor’s stewardship – European politicians delivered theirs on how rating agencies should act in future. Those judgements could hardly have been more different.
The new EU rating agency rules amount to little more than an invitation to carry on as before. The final package aims to reduce the over reliance on ratings and make it easier to sue the agencies if they are judged to have made errors when, for example, ranking the creditworthiness of debt. In particular, the agencies will have to be more transparent when they are rating sovereigns, respect timing rules on sovereign ratings and justify the timing of publication of unsolicited ratings of sovereign debt. The politicians’ stance softened markedly during negotiations with the agencies. The proposal for a state-funded agency was quietly shelved. It is a far cry from the blood and thunder that politicians were threatening back when the financial crisis was still raw and unfolding. The mood then was summed up by US politician Henry Waxman, who declared: ‘The story of the credit-rating agency is a story of colossal failure.’ The agencies’ failure to spot the problem with securities had broken the bond of trust and put the entire global financial system at risk. They were told to expect a radical overhaul, perhaps an entirely new system. The House of Lords report into the agencies in July 2011 was tellingly entitled Sovereign Credit Ratings:shooting the messenger?
Shooting the Messenger?
The four-month inquiry criticised the agencies’ role in the 2008 banking collapse but concluded its EU sovereign downgrades ‘merely reflected the seriousness of the problems in some member states’. The politicians’ overall view on the agencies? They should learn from their past failure to spot emerging risks. Well, yes. A little later, at the height of the Eurozone crisis in August 2011, one leading politician agreed with the Lords’ stance: ‘Credit-rating agencies, however imperfect, are trying to give market investors some idea of the creditworthiness of economies and businesses. They did not cause this.’ Such a view is perfectly reflected in the light-touch ratings agency regulatory regime now swinging into operation. The politician who struck the conciliatory note of reality? Yes, you guessed it: he of the recent credit downgrade, UK chancellor George Osborne.
This article first appeared in Accounting and Business magazine, UK edition, April 2013