If you don't like the answer...
Saturday, 17th December 2011
Ratings are back in the spotlight as several euro zone countries nervously await the agencies’ verdicts. But if Europe doesn’t like the scores the American agencies assign, maybe the right answer is to create one of its own.
It’s a very long way from sovereign debt ratings to rating individuals – but a recent blog posting from consumer credit scorer FICO demonstrated how even this simple process can fail to give the complete picture. Different agencies could give the same consumer different credit scores, FICO’s Joanne Gaskin said, because of tradelines not being reported to all agencies, or the lender reporting data to different agencies at different times, or inconsistencies in the classification of consumer finance company accounts, or differing data management practices.
If there’s scope for so much variation in something as apparently simple as predicting whether someone is likely to default on their credit card or mortgage, how much more scope is there for misleading scoring when it comes to rating complex financial products of the kind that that brought the banks to grief – let alone the likelihood of entire countries defaulting?
The World Bank has weighed in recently, with its General Principles on Credit Reporting, designed to address the current absence of any systematic guidance for the various stakeholders. The principles are basic enough: credit reporting systems should have sufficient data, collected systematically; be reliable and efficient; accountable and transparent; have a clear legal and regulatory framework; and facilitate cross-border data transfers.
If even principles as basic as these still need to be spelt out, it’s small wonder that Bloomberg and Kroll in the United States decided to challenge the established players, with new and more transparent measures of their own (LiveWire comment here). Now Europe is following suit with the announcement by the Bertelsmann Foundation (Bertelsmann Stiftung) that it is to work with international experts to develop a further independent ratings agency.
It too will make use of transparent criteria but, unlike its American counterparts, this one will be non profit making. And, dedicated exclusively to evaluating individual countries, it has the established players – Fitch, Moody’s and Standard & Poor’s – firmly in its sights.
“The euro crisis has shown that not everyone is happy with the existing ratings agencies,” said the Foundation’s chairman Gunter Thielen, adding that the agencies lack legitimacy and transparency and use too narrow criteria for their country analyses.
Its not-for-profit status may endear it to European countries and institutions that are arguably less enamoured of red blooded Anglo-Saxon capitalism. Only time will tell whether it will gain widespread acceptance among European governments – unlike the United States where (LiveWire comment here) the Big Three seem to have a knack of bouncing back.