Credit ratings agencies: Messengers or Bouncers?
- Patrick Craven
- 11 Jan 2017 10:45 (South Africa)
One story that is sure to remain in the news in 2017 is the role of credit rating agencies, particularly whether or not they will condemn South Africa to “junk status” with potentially terrible consequences for the country.
But who are these unelected American-based companies, and why do they appear to have a far greater influence on government policies than we the people who elected that government and how have they acquired such great power over our lives and our future?
Most pro-capitalist commentators portray them as like inevitable facts of life, like the weather or diseases – something that we can do nothing to stop but only react to. Professor Raymond Parsons, in an article in Business Day on 6 January 2017, suggests that these agencies are merely advisors or “messengers”:
“The resentment felt by those who dislike the intrusion of the rating agencies into a country’s domestic affairs is understandable, if misplaced. We must retain perspective about the value of external advice and take it seriously. We still pay doctors and specialists, even if they often have to convey bad news about our health. There is no purpose in wanting to shoot the messenger. If a country wishes to get the ratings agencies off its back, then it must be seen to be taking the right decisions and implementing them. And to do so not just because outside experts may be urging it — indeed, their views resonate with much of the internal debate — but because we are convinced these are the right things to do.”
But they are not just messengers. That may have originally been the role of these agencies, whose history goes all the way back to 1860 when Henry Poor wrote a history of the finances of railways and canals in the United States as a guide for investors. In 1906 the Standard Statistics Bureau was set up to examine finances of non-railway companies and the two merged in the 1940s to become Standard & Poor’s.
Moody's was started in 1909 by John Moody, who published an analysis of railway finances, grading the value of its stocks and bonds. John Fitch set up the third and smallest of the three in 1913.
These big three are are officially endorsed by the US financial watchdog - the Securities and Exchange Commission (SEC) – which designates them as “Nationally Recognised Statistical Rating Organisations”. Some American regulated investment funds are required by the SEC to hold only those bonds that have a very high rating from one of the three accredited agencies.
They have an income of hundreds of million of dollars and have big shareholdings in many other lesser-known ratings agencies, some of which may well simply be “messengers”. But these big three are clearly not just messengers but enforcers of the policies demanded by wealthy investors to discipline companies in which they have shares or have loaned money.
They play the role of bouncers, with great power to discipline companies with bad credit records, or which are deemed unlikely to be able to repay loans. A negative report from an agency deters financial institutions from giving the affected company further loans and may even force them into bankruptcy and being thrown out of the capitalist club. They also assess such things as companies’ economic, regulatory and geopolitical influences, management and corporate governance attributes and competitive position.
What should concern us most however is that increasingly these powers are being used to discipline not only companies that borrow money but national governments, to whom all the same criteria are applied, including areas which are clearly political, such as governance and potential instability.
If a country is deemed to have contravened the rating the agencies’ requirements and their rating is lowered, it tells investors that it is a riskier area in which to invest or lend. They are then likely to at least demand higher returns on loans or refuse to lend money at all.
So these agencies have become important, unelected and dangerous players in countries’ political life. This is where Prof Parsons’ medical analogy goes off track. The illnesses of which doctors inform the patient (except perhaps in cases of heavy smokers!) are normally the result of an inherited genetic condition or an infectious virus, and thus unavoidable.
Credit rating agencies however, are not products of nature but man-made institutions created for specific political reasons – to protect and advance the capitalist system and the profits and privileges of the ruling class. They have only acquired their power because they are respected and/or feared by so many other role players.
Among businesses this relationship makes some sense. While capitalist propagandists love to prattle about the virtues of the “free market economy” in reality it has always been a highly regulated system, with rules and institutions to protect the capitalists mainly from each other. Rating agencies are just one of many institutions set up to police and protect their money and the system.
But why should elected governments and ruling parties, including the African National Congress – which talks about fundamental economic change in the interests of the majority and pays at least lip service to the radical Freedom Charter – allow these capitalist bouncers to blackmail them into following neo-liberal capitalist policies that are diametrically opposed to those on which they were elected?
The National Treasury and successive Finance Ministers have been the most slavish followers of the rating agencies. As Professor Patrick Bond wrote in The Conversation on 15 November 2016, about Pravin Gordhan’s medium-term budget: “There was nothing radical or transformative… Gordhan’s budget revealed how the foreign credit rating agencies’ threat of a ‘junk’ rating was reaching maximum power just before they follow through with a dreaded downgrade.”
He shows how the minister tailored his deficit targets to align them with the the agencies’ demands - 2.5% for 2017 (down from 4.1% for 2014, 3.9% for 2015 and 3.4% for 2016), which can only be achieved through public spending cuts, leading to even slower economic growth and deepening poverty.
For 23 years years the National Treasury’s policies have led to rising unemployment, widening inequality the commodification of basic services, and all the conservative policies in the misnamed Growth, Employment and Redistribution Strategy and the National Development Plan, which have strengthened the power of the still overwhelmingly white and male minority who own and control the South African economy.
The ANC’s recent January 8th statement repeated yet another vague commitment to radical economic transformation but the statement not only does not explain what this means but more crucially ignores the fact that for 23 years the ANC has been pursuing the exact opposite strategy, the conservative line dictated by the credit ratings agencies and there is no recognition that this is the source of our problems.
The agencies are now interfering in areas which are indisputably political, such as government appointments. While South Africans have very right and indeed duty to condemn corruption and croneyism and oppose attempts to appoint those implicated, we should do so because this is the right course, not because American ratings agencies order us to do so.
If we are serious about “economic transformation” and the full implementation of the Freedom Charter then we have to build a party and elect a government which liberates the people from dictatorship of these companies and the whole class which they represent, by nationalising the commanding heights of he economy under democratic workers’ control and using the countries’ wealth for the benefit of the majority, not the parasitic rich minority of which credit rating agencies are integral and pernicious players. DM