Is the world’s business unfairly distorted by credit reference agencies?

Posted by Kelvyn Gardner on August 08, 2011

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As the financial markets are plunged into further sessions of turmoil, I’m wondering whether it’s time to call a halt to the credit reference agencies. Consumer confidence is a delicate beast, and yet in our industry, like many others, we are dependent on it for most of our livelihood. I’m no economist, but the thousands of hours of TV and radio, and miles of newsprint dedicated to the world’s finances since the crash of 2008 leave no one in doubt that every single aspect of the world’s finances is linked to every other aspect. Thus if the ‘markets’ think that Greece can’t pay its debts, banks in other European markets find their share prices falling through concerns that they will have to ‘take a haircut’ in the parlance. Banks who take such a hit on sovereign debt curtail lending to business, or hike up the interest rates on existing borrowings, to shore up their balance sheets. The banks’ customers suffer in turn. Take the example of a mythical, promising new toy company, in its third trading year and working with licenses for the first time, which suddenly can’t afford to invest in enough stock for the 2011 Holiday season, so expensive have its loans become.  Or the retailer whose overdraft can’t stretch to cover the rent ( the level of which was agreed five years ago ) on their premises, and can’t get bank finance to allow it to buy in the great new toys from our mythical licensee. All of the individuals in these businesses are consumers, and they and their staff members are surely not going to be high in confidence with the business caught in these sorts of trap.

So who to turn to? It seems that the ‘markets’  are being driven to a ludicrous extent by the credit ratings agencies. Now, I can see why such bodies exist – on a micro level all businesses seek credit information on potential customers. But the big players who pronounce on government liquidity and the health of giant corporations have surely lost all credibility now. Remember, these are the organisations that ‘AAA’ rated the millions of dollars in collateralised debt obligations whose source was the junk mortages that American consumers could never afford to pay. And it’s these people who are now in all seriousness asking us to believe that the United States of America is no longer a super-secure home for lending. And on the back of this the ‘markets’ panic once again, and we all must get used to waiting a little longer for our economies to recover.  I don’t think our consumer, our licensee, our retailer, should be at the mercy of such clearly discredited ‘information’.  I’d like to see governments acting in unison ( I know, a distant dream ) to repudiate these agencies, and to declare that, henceforth, they do not recognise them. Whatever ‘science’ they may have claimed lay behind their pronouncements has been shot to ribbons by their performance in recent years.  The EU governments could surely do so, given that their every move in these difficult times is being scrutinised and critiqued by folks who seemingly couldn’t organise a ‘booze -up’ (to use the polite version) in a brewery. I so hate to see hard-working businesses crushed by the spurious opinions of a few. Let’s get rid of them, and get back to doing the real business of making and selling things.