South Africans breathed a collective sigh of relief on 3 June, when ratings agency Standard & Poor’s maintained the country’s investment grade status, declining to downgrade SA to dreaded ‘junk status’.
There was no shortage of media coverage warning of the grave economic consequences of a downgrade, but hardly anyone stopped to ask how sovereign countries have become so afraid of private ratings agencies, or whether this was a good thing.
What’s is the purpose of ratings agencies?
Ratings agencies can serve a valuable service by making the creditworthiness of securities more transparent, which should increase capital investment and spur economic growth.
How well they perform this important function was tested in dramatic fashion after ratings agencies totally failed to provide proper oversight in the lead up to the subprime crisis of 2008.
Perhaps that failure shouldn’t be surprising. After all, Wall Street wasn’t just the main object of oversight – it’s also the rating agencies’ most important customer! With hindsight, it seems perfectly obvious to ask questions about the objectivity of agencies in relation the banks to which they sell their services.
The agencies’ subservience arguably goes deeper than a conflict of interest among equals. The most entertaining demonstration of the cultural divide between Wall Street and its overseers is probably in Michael Lewis’s The Big Short, which documents how traders can be identified by looking out for alpha males in bespoke tailoring, while ratings agents tend to be wallflowers in cheap off-the-rack suits.
Why are these poindexters so influential?
Ratings agencies may not be as rigorous or objective as we would like, but the pronouncements of the Big Three (S&P, Fitch and Moody’s) have a serious impact on investor confidence.
How did they become so influential and, more important, why must independent nations structure their own policies to conform to the demands of the agencies?
We need to step back and consider the growing influence of global markets on domestic policy. For what is a grade from a ratings agency but a vote of confidence on behalf of the markets?
In today’s globalised, highly-financialised economy, it may seem obvious that countries simply must adapt their policies to the demands of the market. But it wasn’t always like this. In the first half of the 20th century, governments had considerably more discretion over things like fiscal policy and labour market regulation, which also meant that policy was sensitive to the demands of the electorate.
This changed with the turn to neoliberalism in the 1970s onwards, a trend especially influenced by the policies of the Reagan and Thatcher. Financial deregulation, privatisation and liberalising labour markets, as well as reducing trade barriers, lead to greater economic interconnectedness and much freer flow of capital across nations, as well as spurring the development of sophisticated new financial products. The growing orthodoxy of supply-side economics also put constraints on how much revenue could be derived from taxation.
Thinking with market logic
What were the overall effects of the neoliberal turn? It unleashed the dynamism of markets, promoted entrepreneurship at an unprecedented rate, gave us all amazing new technologies, hugely expanded the global middle class and brought millions out of poverty. Or it skewed economic development towards the rich, destroyed social protections, made utilities inefficient and made the lives of millions of workers in marginal counties, and now even in the West, precarious and miserable. It depends whom you ask.
The upshot is that the logic of the market garnered much great influence and even moral force.
For example, nations’ increased dependence on the bond market, rather than through taxing its citizens, also changed the way we perceive the moral liability of states as independent entities. As sociologist Wolfgang Streeck put it, “in the rhetoric of international debt politics, nations appear as homogenous moral individuals with joint liability; no attention is paid to internal relations of class and domination.”
That logic has also arguably altered the way we understand economics in terms of domestic policy. As Streeck points out, redistributive policies need to be “publicly debated and actively implemented, and can be attributed to individuals who are liable for those decisions. Market judgements, on the other hand, “seem to fall from the sky without human intervention and have to be accepted as a fate behind which lurks a higher meaning intelligible only to experts.”
A corollary is the notion that investors’ decisions about where to put their money is simply the result of the transcendent laws of economics, whereas striking workers are simply disrupting the natural functioning of the economy.
Again, whether this is good or bad depends on many considerations. Imposing a healthy dose of rational economic discipline on wayward domestic politics might be just what the doctor ordered to ensure economic growth and stability. ( Arguably is the whole point of many trade agreements and supranational unions such as the EU is a technocratic smoothing over of democracy’s rough edges). Or it may be of way of imposing very narrow class interests from above. Perhaps it’s a bit of both.
Whatever we think of our globalised world, we should bear in mind that often what seems like iron laws of economics are simply accidents of history. And we should remember that as democratic citizens we have the right to determine our own future.