by James Watkins

Whether voiced by George Osborne at the dispatch box or by Andrew Neil on the This Week sofa, the message is the same: it is too late to change course on the massive deficit reduction plans, otherwise the markets would be spooked. This new line is a response to the growing success of the belated Labour campaign that the cuts go “too far, too fast”.

So how does Labour now move from the government’s line that the cuts are needed to tackle the “mess” of the Labour years to the fatalistic line that it is too late to change course. The heart of the counter attack is to expose the fallacy that the views of credit rating agencies should always be heeded.

Credit rating agencies are necessary. To oversee levels of debt and economic performance, independent and well run credit rating agencies have their place. The markets cannot function properly if risk is not independently checked. Otherwise business judgements would be made in the same way as playing poker in the dark.

But the credit rating agencies have not been as good at their job as they have at their PR. Between 2002 and 2007, an estimated $3.2 trillion in loans were made to US homeowners whose poor payment records were known. These loans were bundled up in securities – or investment packages – that were sold across the world. As the respected economist, Joseph Stiglitz, said

“I view the rating agencies as one of the key culprits. They were the party that performed the alchemy that converted the securities from F rated to A rated”.

Then in April 2010 a cross party US Senate committee harshly criticised two credit rating agencies – Moody’s and standard & poor’s – for allowing the banks to “sell high risk securities in bottles with low risk labels”. It has been reported that one senior Moody’s manager even claimed that “pressure from banks” meant “it is quite common for banks to ask for analysts to be removed”. The whole system of self governing oversight of the markets led to the former US federal reserve chairman, Alan Greenspan, expressing his “surprise” that the markets did not function “rationally”.

With credit rating agencies having such a poor track record over recent years, why would the fear of their judgements contribute to the view that the markets would not accept any change of course from the government?

In part, that was because the calls for international action to regulate the agencies have not yet led to tangible action. In addition, the markets were given a fright by their own response to the agencies in the dying days of April 2010. While Labour activists at that time were focused on the psycho-drama between Gordon Brown and Mrs Duffy, the decision of standard & poor’s to categorise Greek government debt to junk status led to a collapse in market confidence in Greece. The European Union was not amused. It said it expected credit rating agencies to “take due account of the fundamentals of the Greek economy and the support package being prepared by the European central bank and the international monetary fund”. Spain’s and Portugal’s credit worthiness were also downgraded by the agencies in April 2010.

The real concern about the reliance on credit agencies is that their views seem to be unduly influenced by Friedmanite economics rather than the moderate Labour’s moderate Keynesian approach. Moody’s had already hinted in 2009 that they did not approve of the Labour government’s Keynesian approach to pump-priming the economy out of recession.

On 7 May 2010, standard & poor’s said there was a one in three chance of the UK’s triple A credit rating being cut if Labour stayed in office. It said “our focus is on whether the government’s financial consolidation plan to be unveiled in due course is likely or not in our view to put the UK government debt burden on a secure downward trajectory over the medium term”.

A senior economist at citigroup bank also declared on 7 May 2010 that the “firestorm sweeping global markets” could hit Britain, adding “a coalition of Labour, Liberal Democrats and nationalist parties could well precipitate a market breakdown”.

But the approach of some key market participants and the carefully worded statements of the credit rating agencies seemed to show an aversion towards Keynesian pump priming to help our economy back to recovery. And this was in part based on the perceived wisdom of the credit rating agencies, whose judgements on securities proved so way off the mark in the 2008/09 global financial crisis.

On the one hand, the government’s fear-mongering that, in terms of debt, Britain – the fourth richest country in the world – could go the way of Portugal – one of the poorest countries in Europe – is otiose. And on the other, there is a legitimate concern that credit rating agencies are making judgements on national debt levels based more on politics – with a neo-conservative bent – than on the figures.

So, the time is more than overdue for the commitments Gordon Brown gained from the G20 to be put into force. International regulatory oversight of the credit rating agencies is needed, to prevent the world economy from being hamstrung by false assumptions and perverse decisions.

James Watkins is a member of the Unite national political committee. He writes in a personal capacity.

Tags: credit rating agencies, James Watkins, Moody's, standard and poor's

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