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Stephen Archer is a speaker with great charisma. By using illustrations and personal experiences and not being afraid to share his own point of view of the current situation and who is to blame for it, he engages the whole audience, at the same time helping us all to understand the credit crunch a little better.

— Warwick Business School

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Credit Rating Agencies : Mystery bodies controlling our destiny

Few people had heard of them or taken much notice of them until a few years ago but now their role in our economic destiny has come into sharper focus.

It is the CRA’s view of the UK economy that has led George Osborne to pursue the economic medicine that he has prescribed. It is the CRAs that are on the sidelines but acting as judge on Greek debt and other Eurozone debt. Now the unthinkable has happened, the CRAs are issuing warnings on the US economy. Hardly surprising with $14,300 trillion in debt but their verdicts may create a potentially huge aftershock from the financial crisis of recent years. CRAs may issue a simple assessment of US debt risk and turn the global economy upside down over night.

CRA’s have been around for decades. There are about 75 worldwide but the market is dominated by American CRAs; in particular the ‘big three’; Fitch, Standard & Poor and Moody’s. They rate all manner of bodies, states, institutions, corporations, financial bodies and many other ‘risks’.

They dive into very detailed statistical analysis and tests and create risk stress tests – worst case scenarios if you like. Their services and information are sold to the same bodies that they examine. This leads to the first charge of potential impartiality given that they serve the ‘horses and the hounds’.

For all their thoroughness and probity they have made some huge errors. All the banks and sovereign states enjoyed strong ratings before the falls.

Ireland in particular is a great example. An economy built on gambling, property and hope was given a clean bill of health. RBS, Fanny Mae, Spain, Greece and countless others all looked rosy in the CRA’s eyes. It helped fuel belief and confidence but only made the collapses in confidence and the flights from exposure worse. Since these failures the views of CRA’s pronouncements are still listened to but with perhaps more caution and pessimism. Perhaps CRA’s are also more cautious or even over cautious now. But if anyone can be the author of a self fulfilling prophecy then it is by definition the CRAs.

Yet CRA’s are un regulated and unaccountable, though many victims of Bernie Madoff are after the skins of CRAs.

Now, with the Eurozone and Greek crisis at its peak and the US debt resolution uncertain the CRA’s are being watched like the soothsayers and fortune tellers of old. It is one thing that they are listened to – it is very serious when their pronouncements can mean more suffering for institutions and people.

Europe is badly in need of a CRA of standing and in my view their role is too important to go unregulated and unchecked. They need independence but they need responsibility and accountability too.

It’s time that these un-seen judges and juries are made transparent with an international code of assessments and conduct.


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