Request to G20 for regulating the financial markets

Credit ratings are normally assigned by private Agencies on demand of the issuers. However, when the issuers and investors are very Big (for instance States) the rating Agencies play a role too big for their capacity to remain impartial. The values of such ratings has been widely questioned after the 2008 financial crisis.

Let’s read a few rows in Wikipedia : if an Agency cuts the rating of bonds issued by a State indebted on long term, this gives rise on short term to an increase of the interest applied to the bonds, that is an increase of the State financial burden. The issuer might be compelled to sell off his real estates or goods to reduce declassifying .

This is just what we saw in the last days of April 2010. After an exhausting negotiation, the Euro Countries went (April 26) on approval, together with the IMF, of a credit to Greece amounting to 45 billion Euro per year (110 billions over 3 years) at acceptable interest, in connection with an adequate commitment of the Greek government.

The day after, Standard & Poor’s declassified the Greek bonds to BB+ (Junk bonds), so these were sold in the Stock Exchanges at an interest rate not less than 10%. The greek government protested with the Agency, but it was too late.

Some days after, a new declassifying operation was repeated on bonds of Spain and Portugal. Successively Moody's recalled that also Italy and United Kingdom show public debts and annual deficits too high respect the EU standards.

After the losses suffered by the Greek bonds, some economists observed that the credit needed by Greece to avoid default will amount to about 70 billion Euro per year. This means that Greece will give back not only the 45 billions, but also other 25 billions to some creditors which speculated, thanks to a suspect rating, on a financial operation between two parties. In other words, the system of free market “regulated” by private rating agencies presents an extra cost which compels the indebted countries to return much more than the original debt.

The question arising from these facts is the same that troubled the governments during the 2008 financial crisis: Why some private Agencies have the power to trigger the financial default of the bank’s system and even of the States ?

This power is unacceptable because only the States have the democratic power to take decisions about politics and macro-economics. A solution has been immediately foreseen by EU governments through the institution of an European rating Agency. A collateral action to avoid conflict of interest between private operators, has been made by the US Senate which on May 14 established that in the emission of derivative products the choice of the rating agency pertains to the Securities and Exchange Commission (SEC). However much work needs to be done in regulating the global financial market.

Let’s remember that two years ago many industrialised countries discovered that a great financial bubble (a US Court is just inquiring about its origin) triggered the default of banks, followed by a general economic recession centered in the G20 area.