A recent column by Deven Sharma, president of Standard & Poor’s in the Financial Times raises the question of what the appropriate role of independent credit ratings should be in policy making. Specifically, should policymakers rely mostly or exclusively on credit ratings to determine policy choices and direction? According to Mr.Sharma, allowing the anticipated reactions of the rating agencies to sit “at the heart of policymaking, [is] a role that rating providers did not seek.”
Instead, Mr. Sharma argues that policymakers should reduce their reliance on credit ratings, citing “excessive focus on rating agency options”. In his July 26th column, he makes the case that an exclusive focus on ratings in Eurozone countries facing debt crises has had the negative consequence of exaggerating the impact of ratings on markets and on public policy. “Rating agencies do not claim to be the sole voice expressing reasoned views about the future. The bigger question for the financial system is how ratings are used by regulators and policymakers.” snip
The alternative? Free policy from any type of mandate or undue emphasis on ratings agencies, substituting prudence and a market test of the value of the ratings agencies themselves. Mandates discussed in the article refer specifically to the debt rollover or restructuring conditions now facing Greece, in which avoiding default as defined by ratings agencies is a condition of the new policies.
The article states: “If ratings are valuable, people will use them. If not, market participants should not be forced to refer to them by mandates from the public sector.
“This is a more constructive way forward that measures that risk undermining the independence, comparability, and value of ratings themselves.”
Point taken, perhaps, for our own increasing reliance on ratings, as well as on stock market movements, and interest rates.