The only time I have been in Athens, I squandered an opportunity to visit the Acropolis. My excuse was feeble: a hangover. For years afterwards, I felt guilty about this snub to the fabled birthplace of democracy. Then I realised it was trivial compared to the very real affront to democracy being hurled at present-day Greece.
If the business press is to believed (and it generally is) shadowy outfits with strange names wield more power than George Papandreou, Angela Merkel and Nicolas Sarkozy combined. Last week the credit rating agency Fitch refused to accept a Franco-German plan that commercial banks should “voluntarily” roll over their loans to Greece. Do that and we will consider Greece to have defaulted on its debts, Fitch announced. One week earlier, Standard and Poor’s downgraded Greece’s rating by three notches, pushing up the cost of insuring Greek debt.
Moody’s, Fitch and S&P control 95% of the credit rating market. It is surely obscene that three private firms headquartered in the US can determine the fate of entire nations.
It is widely known that the trio has done immense harm. Yet – like certain mafia bosses of yore - they seem untouchable. Around this time last year José Manuel Barroso, the European Commission president, asked: “Is it normal to have only three relevant actors on such a sensitive issue, where there is a great possibility of conflict of interest?”
The situation is worse than Barroso hinted. When the global economic crisis erupted in 2008, there were many questions about how the agencies had given positive ratings to institutions engaged in reckless behaviour. The simple answer is that they were rewarded for deceit. In October that year, leading players in the agencies explained to an oversight committee in the US House of Representatives that banks were paying them to present a favourable picture. Bankers who devised highly risky collateralised debt obligations (CDOs) typically chose the agency with the lowest standards, encouraging a race to the bottom, Raymond McDaniel, a Moody’s executive said.
Frank Raiter, a former head of mortgage ratings at S&P, went further by suggesting that deliberate falsifications occurred and that information that would enable thorough assessments of creditworthiness was deliberately withheld. He recalled asking for loan level tapes - data about each individual loan - in a CDO known as Pinstripe. In response, he got a memo from Richard Gugliada, a managing director with the agency, saying: “Your request for loan level tapes is totally unreasonable. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.”
The rise of the ratings agencies is part of a wider corporate coup, which began in America but has had global ramifications. Although the Big Three were all set up in the early part of the twentieth century, it wasn’t until 1975 that they were given official status by the Securities and Exchange Commission (SEC). Thus began a process where an oligopoly was given a vast say in determining how the world’s economy is run.
Marc Ladreit de Lacharrière, the French billionaire who runs Fimalac – the parent company of Fitch – has called himself a “child of globalisation”. His fortune has been amassed thanks to the allergy to regulation that remains prevalent in Washington. In May, the SEC commissioner Mary Schapiro proposed that agencies should publish information revealing how they calculate creditworthiness. But her recommendations do nothing to address the conflict of interests that are at the root of the problem. And so banks will continue to pay the agencies and there will still be strong incentives to turn a blind eye to improprieties.
What should be done in Europe? Michel Barnier, the EU’s single market chief, has been signalling that he wants to put manners on the agencies. But the reforms he has introduced have so far been piecemeal. Forming the European Securities and Markets Authority (ESMA) to supervise the agencies has not deterred them from behaving belligerently towards economies in a parlous state. If anything, it might have prompted them to be even more aggressive in order to show that they are not cowed by pesky regulators. Jean-Claude Juncker, the Luxembourg prime minister who fancies himself as “Mr Euro”, wants Europe to have a credit ratings agency of its own to break the stranglehold of the Big Three.
Tinkering with a system that is inherently rotten won’t make much difference, however. The inspiring street protests against austerity in Greece and Spain show that there is a public appetite for serious reflection on why private interests dictate how the world is run.
Clearly, the ethics of mass indebtedness have to be seriously examined. The next few weeks will see the publication of a book called “Debt: The First 5,000 Years” by the anthropologist David Graeber. He argues that the idea of a mass cancellation of international debt should be entertained. “It would be salutary not just because it would relieve so much genuine human suffering but also because it would be our way of reminding ourselves that money is not ineffable, that paying one’s debts is not the essence of morality, that all these things are human arrangements and if democracy is to mean anything it is the ability to agree to do things in a different way.”
Restraining the rating agencies is a first and necessary step. The bigger challenge is for the public to reclaim our economies from a mafia.
·First published by New Europe (www.neurope.eu), 26 June – 2 July 2011