The Co-op is a positive model of thrift, yet unrepresentative credit agencies are sticking a thumb in the eye of its Lloyds bid
Among the few beneficiaries of the financial crisis have been both the idea and the institutions of the co-operative and mutual movement. With their roots in Victorian self-help it is a nice irony that it should be they that point a way forward from the financial wreckage whose proximate roots lie in the Thatcherite promotion of "Victorian Values". Of course, it is a miracle that so many of them survived at all given that one aspect of Thatcherite deregulation was to encourage the de-mutualisation of building societies. And it is a sobering thought that of those building societies who followed that path, not one has survived as an independent entity.
As the crisis has bitten many have rediscovered the virtues of such organisations. The John Lewis Partnership is now routinely held up as a model for both private and public sectors, while the Co-operative Bank has prospered precisely because of declining trust in the banking PLCs. So those looking for alternative corporate models will have been delighted by last week's news that the Co-operative has been chosen as the preferred bidder for the 632 branches that nationalised bank Lloyds is selling off. However, not everyone is so delighted. The credit rating agency Fitch promptly put the Co-op Bank on "ratings watch negative" as a result of this proposed acquisition.
Until a couple of years ago, few of us had heard of these credit rating agencies, of which there are three main players – Fitch, Moody's and Standard & Poor's. Now, it seems, they are key arbiters of our destiny. In fact, they have been for some time. For it was these agencies that assured investors the packaged-up bundles of sub-prime mortgage debt were "AAA" investments and so, as much as anyone, were responsible for the financial crisis. Since then, they have emerged as among the most significant players in the global economy. It is they who are now daily naming the countries that are, are not, or may not be creditworthy, with enormous consequences for all of us. They depict themselves as mere "reporters" of relative risk, but that is disingenuous. They are also players because the ratings they bestow are self-fulfilling. If they downgrade a country's credit rating because of their assessment of the risk of default, then the cost of that country's borrowing rises, making default that much more likely.
In the process, they have effectively made policy-making by elected governments impossible. If governments implement deficit-cutting austerity measures then they have their ratings cut because the agencies think growth prospects are poor. If governments do not implement such measures then they have their ratings cut because the agencies think that borrowing is too high. Yet the agencies themselves are elected by nobody and have no public accountability at all. It's a political cliche that governmental taxation without representation is illegitimate, but the credit rating agencies to which governments are subservient are entirely unrepresentative of those affected by them. The recent spat between France and the UK as to which country most "deserves" a downgrade is irrelevant except to the extent that it demonstrates this subservience.
The agencies and their apologists wheel out two arguments apart from the nonstarter that they are simply messengers. The first is the standard one of free-market ideologues: the ratings business is a competitive one, and if the agencies do not get it right then they will get no custom. That is self-evidently nonsense. Apart from the fact that it is an oligopoly rather than a perfect market, we know that the agencies did get it wrong with respect to sub-prime derivatives. Yet they continue to thrive and there are no new entrants offering a better service in the way that market ideology predicts. The second defence is that it is the fault of countries themselves that they are so indebted; otherwise they would have no need to worry about the ratings agencies. But that very indebtedness was endorsed by the agencies and would not have existed on the scale it does without them. Moreover, their judgments now seem almost entirely capricious. Never mind what they have done to Greece and Ireland, how can their threat to Germany and their actual downgrading of the United States really make sense except as political gestures?
But suppose it were true that the ratings agencies only have power because we have got ourselves into this mess. In that case we should be looking to reconstruct our economies along more financially prudent lines. As part of that we might look to resurrecting business models of thrift and self-reliance such as those of the co-operative movement. And yet here is a ratings agency putting a thumb in that eye too. Incompetent and discredited contributors to our parlous economic situation and now antisocial blocks to its solution: isn't it time to bring these agencies to account?