The World Economic Forum has added its voice to those raising concerns about a sovereign debt crisis in the US and UK. We have, of course, seen Invesco Perpetual’s Neil Woodford mulling the subject too in recent weeks. It is obvious that if we do face a crisis the credit rating agencies will play a crucial role.
They will, in this case, only be doing their jobs. However this has already provoked a lot of complaints, before what everyone hopes won’t be the fact. In some circles, it is asked how on earth agencies which demonstrated appalling performance over complex mortgage securities, and should shoulder a significant proportion of the blame for the crisis, should now be allowed to deign whether the UK’s public finances are in less than rude health.
There isn’t a lot to say about this certainly on one front. Distinctly annoying yes, but short of passing ratings to some new regulatory body, a sort of international nationalisation of the system to police the world’s financial health, there was always going to be a threat this might happen.
Instead, perhaps, those who understand these things, and indeed IFAs, who have incorporated ratings or relied on them to some extent in the past might and been burnt, at least think whether they are happy with how they are being reformed.
This is EU led. The proposals from the EU directive should be getting incorporated into UK law round about now along the following lines.
Agencies…
• May not provide advisory services.
• Must disclose the models, methodologies and key assumptions upon which ratings are based.
• Must differentiate the ratings of complex products with a specific symbol.
• Must publish an annual transparency report.
• Must have at least two directors on their boards whose salary does not depend on the ratings agency’s business performance.
• Must create an internal function to review the quality of their ratings.
Are you happy with that? The US version is a great deal more – what’s the word? – light touch.
None of this means any sort of debt crisis in the UK won’t see a lot of people wanting to shoot the messenger. However the grievance is more complex than that. They don’t like the messenger because in the past the messenger failed to deliver the bad news fast enough.
If there is a crisis, perhaps advisers are just the sort of market participants at one remove, who should be letting their feelings known.
So if there is a downgrade and people ask your opinion, at least you can say, “at least they have been sorted out now”.
However I still don’t have the confidence that I’ll even be able to do so. Do you?
