One point of view has counted more than any other in Europe over the past few days. After deciding on Friday night that France should be stripped of its top-of-the-range AAA credit rating, the agency Standard & Poor's has faced a lambastin g from EU commissioners. It has heard wheedling from France's prime minister: "We will do everything to get [the triple A] back." Back it or attack it, no politician, economist or commentator has denied that S&P's verdict matters. So much for the death of the critic.
Sure, the carpers will bring up all the times the credit rating agencies have got it wrong in the past. Sophisticates might point out that America lost its triple-A last year and yet when the US Treasury now goes for a loan, panicky investors actually pay it to take their cash. A downgrade needn't spell disaster.
But this is to miss the big point. S&P and its rival Moody's have a power over governments and corporations that far outranks any influence you or I as voters or workers might have. What did Nicolas Sarkozy say after his downgrade? After the requisite few hours of stamping his platform shoes, he vowed to do better with a flurry of economic reforms. Likewise, a couple of years ago, George Osborne justified his planned spending cuts by explicit reference to the agencies: "Judge us … on whether we are able to protect our credit rating."
What gives S&P and Moody's such immense power is not their brilliant analysis: it is simply the function they perform. Whether prime minister or CEO, if you want to borrow from bond markets you need a credit report to show investors. Which means going to the two agencies every money manager has heard of, and getting a credit rating. For all the capital letters and "negative outlooks", the credit-rating agencies are the financial market equivalent of the DVLA in Swansea: the people who award you the necessary licence to get out on the open road.
It sounds boring and technical, which is why no one gets wound up about the credit rating duopoly. You could probably spot Bob Diamond's tan at 100 paces, but you've almost certainly never heard of Douglas Peterson, the former Citibank executive who runs S&P's ratings. Yet Peterson, as one of the two main gatekeepers to the world's credit markets, is far more powerful than Diamond. He's also head of a business that last year pulled in $1.7bn. These companies are big and they're powerful, yet their status is almost never questioned.
Why should S&P and Moody's earn such vast sums? Certainly not for their oracular genius – the agencies have as much foresight as Mr Magoo. In my working life, the credit-rating duopoly has failed to warn investors about the Asian financial crisis, Enron, the subprime crisis, Lehman Brothers – and Greece. My particular favourite, Moody's report dates from December 2009 and is titled "Investor fears over Greek government liquidity misplaced". Six months later, Athens received a $147bn rescue package.
Nor are they much cop at analysing corporates, either. Consider this statistic from Sukhdev Johal at Royal Holloway University of London: of the corporate debt rated by S&P as AAA, 32% has been downgraded within just three years, 57% within seven years. That is a huge discrepancy and one that you and I end up paying for through losses on our pension funds. But not the agencies: since every borrower still needs a rating, however offbeam, their pre-tax profits have barely been touched by the financial crisis.
Since they can't rest on their records, the dis-credit agencies prefer to drape themselves in the cloak of science, claiming the work they do is highly technical and independent. But the anthropologist Alexandra Ouroussoff has spent years studying the agencies; she remembers how in the middle of last January's turmoil in Tunisia, S&P issued a report warning of "downward ratings pressures" on neighbouring governments if they tried to calm social unrest with "populist" tax cuts or spending increases. That extraordinary intervention in the middle of a revolution amounted to one dictum: screw your people and screw political stability; to remain financially viable, you have to stick to your spending plans.
Rather than stick to obscure technicalities, the duopoly is not above meddling in politics: ask the state legislators of Georgia, in the US. In 2003, well before the sub-prime bust, it brought in strict new laws to clamp down on predatory lending. Other states were set to follow – until S&P retaliated by saying it wouldn't rate mortgage-backed bonds made in Georgia. The law duly torpedoed, other states warned off, the dis-credit agencies proceeded to carry on raking it in.
So, the agencies are neither accurate nor merely observers – yet they bully governments around the world and make billions doing so. The obvious solution would be to take this public service into public hands. Let's have a ratings agency run by the UN, funded by pooled contributions from both lenders and borrowers. It should be the only one to have preferential access to data from corporates and countries. Let's make the ratings business a utility, rather than a semi-cartel that intimidates elected politicians and rakes in excess profits. It's time to break up the bullying double-act.
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