Many in the developing world would believe that it’s the beginning of the end for the West’s financial system. China, for instance, has already started driving nails into the West’s coffin.
A Chinese credit rating agency, Dagong, this week released its own sovereign ratings to rival those published by Standard & Poor’s or Moody’s—all US firms. Dagong branded the US, otherwise “AAA”, a mere “AA”, that too with a negative outlook. What Dagong is suggesting here is that the likes of Moody’s have been favouring the financial system they’re part of: Hence, the US and the UK have high ratings, which they exploit to borrow a lot. In this narrative, the Western rating system has been “irrational”, creating the worst credit crisis in decades.
Some of this rings true. Rating agencies played no small part in the housing bubble by blessing bad mortgage securities. And they’re again under scrutiny for the unsystematic way they’ve been downgrading European countries since April. That’s not all: More challenges to the West’s dominance over global finance are surely welcome. With some of the West’s orthodox intellectual edifices crumbling— say, capital flows—others should be scrutinized too.
Yet, this narrative is incomplete. First, the problem may not be that this particular edifice is Western, but rather that rating agencies in the US have been operating as a government-enforced oligopoly—because of which they failed there too. Ever since US regulators anointed a few of them “nationally recognized” in 1975, they have acted as the “keepers of the key”. This means no other agency within the US system can challenge, say, Moody’s.
Without the necessary US reform, it’s only natural that the challenge to Moody’s will then come from outside the US system. Dagong isn’t going to be the first non-Western agency. In fact, if done right, global competition for credit ratings by truly private agencies can be a boon. But that’s hardly assured.
The trouble begins, second, when governments push for their agencies to release sovereign ratings and that too influence them (are we to believe that Beijing’s authoritarian hand is not behind Dagong?). We would then get an international system where governments—all for the sake of opposing the West—are not just perpetuating a different oligopoly, but also enforcing their own nationalistic biases. Notice that Dagong conveniently rates China, still intoxicated from a debt binge, “AA+”.
Amid the confusion of such a beggar-thy-credit-rating system, international investors may be forgiven for going back and digging up old graves.
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