We must free ourselves from the tyranny of the credit rating agencies

The disastrous record of the rating agencies proves that they do not deserve their exalted position.

"We have not overthrown the divine right of kings to fall down for the divine right of experts."

Harold Macmillan

When Macmillan warned about a tyranny of "experts", he probably didn’t have the credit rating agencies in mind.  But in 2012, it probably applies to them more than any other category of experts. These anonymous bodies hold enormous power over democratically elected governments. Their musings are often enough to force a government turn away from the democratic mandate on which they were elected. Only yesterday, Moody’s caused panic by stripping France of its AAA status.

Have these anonymous, powerful experts deserved the credibility and the exalted position they are given by the media and politicians? Have they shown real foresight that merits their ability to lecture elected politicians? In almost all cases, the answer is no. 

In December 2009, Moody’s decided to address growing concerns about the indebtedness of the Greek government.  Its declaration was clear, decisive and wrong, with its report being titled, "investor fears over Greek government liquidity misplaced." Moody’s suggested that, "the risk that the Greek government cannot roll over its existing debt or finance its deficit over the next few years is not materially different from that faced by several other euro area member states." It then went on to declare that, "there is an extremely low probability that the government's liquidity will pressured."

Only six months later, the first EU/IMF bailout package – of €110bn was agreed. And this slip up from the credit agencies came just over a year after their failure to predict the financial crisis that pushed most of the western world into recession. Lehman Brothers and AIG were still AAA or AA rated just before they collapsed.  At the congressional hearings into the pre-recession failure of the credit ratings agencies, they were accused of offering "opinion", rather than analysis.

Nor was this a one off. Sukhdev Johal has analysed what happened to corporate debt rated AAA by Standard & Poor.  Within three years, some 32 per cent of this debt has been downgraded and a massive 57 per cent had been downgraded within seven years. That doesn’t really suggest that the lionised credit rating agencies have much credibility in either the short or the long term.

There are important discussions to be had about the way in which European economies should be heading and crucial debates about a variety of policy directions. But we should stop kidding ourselves about the credit ratings agencies and stop thinking that their declarations should be decisive.

You can follow David on Twitter @djskelton

A sign for Moody's rating agency is displayed at the company's headquarters in New York. Photograph: Getty Images.

David Skelton is the director of Renewal, a new campaign group aiming to broaden the appeal of the Conservative Party to working class and ethnic minority voters. @djskelton

Getty
Show Hide image

Carwyn Jones is preparing for a fight with the UK government

From Labour's soft-nationalist wing, Jones has thought carefully about constitutional politics. 

This week's 20th anniversary of the 1997 Yes vote on devolution in Wales was a rather low-key affair. But then while there are plenty of countries around the world that celebrate an Independence Day, few nations or regions around the world would make much fuss about "Partial Autonomy Day".

The most important single event of the day was, almost certainly, the address by First Minister Carwyn Jones at the Institute of Welsh Affairs’ 20th anniversary conference. The sometimes diffident-seeming Welsh Labour leader has rarely been on stronger form. Much of his speech was predictable: there were his own recollections of the 1997 referendum; some generous reflections on the legacy of his now-departed predecessor, Rhodri Morgan; and a lengthy list of identified achievement of devolved government in Wales. But two other features stood out.

One, which might have struck any observers from outside Wales was the strongly Welsh nationalistic tone of the speech. In truth this has long been typical for Jones, and was a very prominent element of the successful Labour general election campaign in Wales. A fluent Welsh-speaker and long a part of the soft-nationalist wing of Welsh Labour, the First Minister briefly considered what would have been the consequences of the achingly-close 1997 ballot having gone the other way. Wales, we were told, would no longer have had the right to be considered a nation – it might even (gasp!) have lost the right to have its own national football team. But this theme of the speech was also linked to devolution: why should Wales not have parity of treatment on devolved matters with Scotland?

The most striking feature of the speech, however, was the confidence and combativeness with which the First Minister set about attacking the UK government on constitutional matters. This territory has often appeared to be the area which most animates Jones, and on which he is most comfortable. He has clearly thought a great deal about how to protect and develop the constitutional status of devolved Wales. The First Minister was clearly deeply unimpressed by the UK government’s handling of Brexit as a whole, and he linked Brexit to broader problems with the UK government’s approach to the constitution. Brexit was declared in the speech to be the "biggest threat to devolution since its inception" – and the audience were left in no doubt as to where the blame for that lay. Jones was also clearly very comfortable defending the joint stance he has taken with the Scottish National Party First Minister of Scotland, in opposing the EU Withdrawal Bill and much of the UK government’s approach to Brexit negotiations. This high level Labour-SNP cooperation – extraordinary, given the otherwise utterly toxic relations between the two parties – was argued to be the necessary consequence of the UK government’s approach, and the threat of a power-grab by Westminster of powers that are currently devolved. 

Finally, the First Minister had one new card up his sleeve. He was able to announce a Commission on Justice in Wales, to be chaired by a figure of impeccable authority: the soon-to-retire Lord Chief Justice of England and Wales, John Thomas. The clear intention of the Welsh government seems to be to use this commission to advance their agenda of a distinct Welsh legal jurisdiction. This is another matter on which there appears to be little current common ground with the UK government.

Carwyn Jones emerged from the general election as a greatly strengthened figure: having led the Labour campaign in Wales when it appeared that the party might be in difficulty, he deservedly accrued much political capital from Welsh Labour’s success in June. The First Minister has been thinking imaginatively about the UK constitution for some years. But for a long time he failed even to carry much of the Welsh Labour party with him. However, he succeeded in having many of his ideas incorporated into the Labour UK manifesto for June’s election; he is no longer a voice crying out in the wilderness. On the anniversary of devolution, Jones said little that was wholly new. But the combination of everything that he said, and the tone and confidence with which he said it, was striking. This was not the speech of a man looking to back away from a confrontation with the UK government. Wales seems up for a fight.

Roger Scully is Professor of Political Science in the Wales Governance Centre at Cardiff University.