Wednesday, November 30, 2011

Ratings agencies & market instability

Today's Armidale Express column is on the evils of the rating agencies. This will come on line next week on the New England blog.

The crux of my argument is that we have institutionalised the role of the credit rating agencies to the point that they and their ratings have become destablising and destructive. Here I said in part:

The institutionalisation of agency ratings, their incorporation into so many regulations and arrangements, meant that variations in credit ratings had direct flow on market effects in ways that no-one had foreseen. The ratings system itself had become a direct cause of market instability and on a large scale.

It appears that we simply cannot help ourselves.

Yesterday, the Australian Government released its Mid-year Economic and Fiscal Outlook 2010-11. As part of the local discussion, the Treasurer and Shadow Treasurer exchanged verbal blows over the decision by the Fitch agency to award Australia triple A rating fore certain debts, meaning that all three of the major agencies now do so. The Treasurer crowed look how well we are doing compared to others, not so said the shadow Treasurer.

I found the whole thing slightly repulsive because it provided a further illustration of the way in which the agencies' roles have become institutionalised. There was also a beggar my neighbour element in the Treasurer's comments. Ratings intended, however poorly, to provide market information have become another weapon in the competitive battles between nations.

Neither the ratings nor the rating agencies themselves can support the roles now placed upon them. They don't inform the markets, they can actually determine the markets. To my mind, this is quite pernicious. Does anybody seriously believe that the Fitch change actually says anything about the Australian economy?  

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