Friday, 23 June 2017

Credit Rating Agencies and Australia: Australians Braced for the Plague of the Credit Rating Oligopoly

This short post today looks at the news that the rating oligopoly – the three largest agencies; Standard & Poor’s, Moody’s, and Fitch Ratings – has took aim at the Banking sector in Australia. The noises coming from Australia in response are the same noises we hear again and again when the rating agencies turn their collective focus towards a specific sector or a specific region, namely that the ratings downgrade will ‘do little to alter [the] costs of funding’. Yet, there is a much bigger issue, and that is that the cost of borrowing is not the most important aspect, rather the biggest issue is the safety net that the agencies and institutions recognise as being the new norm – taxpayer assistance. In this post, we will look at the current situation in Australia but we will also move back to look at the pattern that keeps emerging: a sector does not perform as ‘experts’ predict that it should, rating agencies collectively smell blood in the water and drop credit ratings, which becomes a self-fulfilling prophecy, and finally the taxpayer of that given region must suffer the consequences – then the agencies move elsewhere looking for blood in the water; this seems to be more of a ‘plague’ than a financial service.

Recently, S&P cut the ratings of 23 small Australian banks, citing the growing risk of a sharp correction in property prices as the underlying factor in its decision. However, the agency stated that it would not change the ratings on the top four Australian banks – ANZ, Commonwealth Bank, National Australia Bank, and Westpac – on expectations that ‘the Australian government would support them if needed’. Yet, two days ago the other dominant force in the rating oligopoly, Moody’s, downgraded the long-term ratings of the Big Four banks, this time citing a rise on household debt and slowing wage growth as the leading factors in its decision. On the one hand, the agencies are zeroing in on a sector that has been coming in for criticism regarding its lending practices – which ultimately led to increased regulation – and is also the subject of a controversial bank levy, one which will see the big four banks and the Macquarie group (who we know from a previous post) subject to a $6.2 billion charge over a number of years. Yet, the banks, and a number of external analysts, are keen to argue that the downgrades will not have any effect, or very little at most, on their ability to borrow, with a analyst from Deutsche Bank stating that he expected there to be ‘no impact on funding costs’. However, this upbeat response is usually the precursor to the next phase of the process – the rest of the oligopoly piling on the pressure – which seems to be confirmed by the S&P Senior Director of Financial Institutions Ratings, who recently stated that ‘there is a chance we could downgrade the big four banks’ – the likelihood of this happening is extraordinarily high, simply because of the dynamics of an oligopoly.

However, there is an underlying sentiment to the ratings’ approach which is being accepted as normal, as something almost ‘natural’: the agencies are quick to point out that they fully expect the Australian State to bail-out the banks if necessary. Is this surprising? The answer to that for anyone who has looked at the business section of a newspaper during the last decade is a resounding ‘no’, but if we deduce the content of these new pieces we can see an extraordinary pattern emerging that consistently only has one loser – the public. One agency will pick up on public information – supporting Partnoy’s claim regarding the scant informational value these ratings hold – and actively downgrade the banks’ ratings; the banks will respond resolutely, but in doing so they attract the attention of the media and other agencies, and they imminently follow suit in downgrading the ratings; the State, having been pressured into becoming the safety net but in reality not wanting to become a lender-at-first-instance, plays down the prospect of ‘quantitative easing’ (bail-outs), which then provides the fuel for rating agencies to downgrade the banks further, which in turn forces the hand of the State to intervene to prevent a full-blown crisis. What happens in this game? The financial actors walk away scot-free, because this whole process is deemed to be part of economics, the rating agencies are somehow justified in their initial warnings because the crisis they prophesised happened, which in turn provides for reputational capital for the next time they turn their gaze towards a sector or region, which leaves just one party – the taxpaying citizen. In this game of ‘conscious complexity’, the public are the safety net which make the whole charade possible. The arrival of the oligopolistic stare in Australia spells bad news for the pockets of Australian taxpayers, but they are not the first to be affected by this organisational plague, and they will surely not be the last, which provides little consolation to the Australian public.

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