Archive for June 7th, 2010

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A new credit rating agency……A good idea……or not?

June 7, 2010

http://euobserver.com/9/30199

So dear readers…….Moody’s, Fitch and S&P to have competition?

An EU based credit rating agency in the shape of European Securities and Markets Authority (ESMA)?

“Is it normal to have only three relevant actors on such a sensitive issue where there is a great possibility of conflict of interest?” he said, referring to the US-based Fitch, Moody’s and Standard & Poor’s agencies. “Is it normal that all of them come from the same country?”

An excellent point.  I am sure that nobody is gullible enough to think that there is no political “advice” given when strengthening or weakening ratings in certain cases.

Credit rating agencies have attracted strong criticism for failing to identify the risk attached to certain financial products such as mortgage-backed securities in the US at the start of the financial crisis.

Also an excellent point.  Many traders deliberately bet against these agencies upgrades or more specifically downgrades and make fortunes for their clients.  Last year Ukraine was downgraded several times by these agencies and yet the Ukrainian stock market led the world for returns for investors in the same period.

This year it continues to be a top performer and the rating have subsequently been upgraded.

I for one, have never paid any attention to the credit agencies…..which begs the question, if traders and even lowly specimens like me pay little attention to them……who does?  It is not as if the three existing agencies agree with each other and regularly one will up/down grade something whilst the others two will not.

Of course it is a free market and therefore there is always room for another agency and I think many would welcome one which is not based in the USA…….but it will be as open to political “advice” as the others.

“You don’t reinforce the Growth and Stability Pact [EU budgetary rules] by diminishing the credibility of the community institutions and the community method,” he told journalists.

“It’s not with new institutions that we are going to do that,” he said, adding that they “could bring new confusion.”

Another excellent point.  There is already a multitude of economic gurus complicating matters to a point where, no matter how much they get things wrong, they have created a system that only they understand (possibly) well enough to put right.

We have systems so complex that even those who created it and allowed it to fail are the only ones we can ask to put it right.  The age of the economic and financial demi-gods is upon us, through our own inability to understand fully the prayers we must make at the altar of ecominic and financial systems.

How would the new European credit agency be different?  Would it take the view that the European age of cutting budgets and slashing spending now is a positive factor, thus downgrading the US alternative approach of continue to pay to support the US economy…….would it make higher ratings for Europe based upon the believe the European solution, rather than the US solution is the right way to go…….bringing an obvious and notable difference to the credit agency market other players?

Which would you believe in the future?  Three US agencies that continually get it wrong……or at the very least are consistantly bet aganst by market players who make good returns by betting against them……..or do you go with a new entity thus to prove its worth and set up with a different psychy to the existing ones?

Well……..it is a good idea or not?

 

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