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New Credit Rating World Order

If any of you were paying attention during the financial crisis of 2007–08, you may remember when the U.S. credit rating agencies failed the entire world. This is not an exaggeration or hyperbole—fundamentally their business models failed and they were completely exposed.

Imagine a bridge builder paying a bridge inspector for an A rating, then the bridge falls down a few years later. Now imagine that same bridge inspector is not only still in business, but the business is flourishing. Shocking? Or just par for the course?

One thing is for sure though, this is not how capitalism is supposed to work, especially the Austrian kind. You have three major international companies negatively exposed all at once… and not a single failure, bankruptcy, head rolled, or prosecution? To anyone who doesn’t find this incredulous, then really weren’t paying attention.

The big question that many have been asking since the crisis is, why does anyone still listen to these agencies? A fair question, but like all things wrapped in politics and money, not easily answered.

In society today, we basically have two distinct tools to help us alter or fix issues—government and markets. Typically how it works, when one fails the other is there to provide the resource or solution. After the credit rating debacle, the U.S. government clearly failed to do their job as regulators to alter the situation, so now it’s up to the market to provide the solution….

And fortunately for us the market appears to be trying to offer that solution via competition.

The Hong Kong based Universal Credit Rating Group (UCRG) claim to be up for the challenge, as they recently announced an advisory board and it certainly wasn’t short on international players. With the likes of Dominique de Villepin, former French prime minister, Kevin Rudd, former Australian PM, Shaukat Aziz, former Pakistani PM, and Igor Ivanov, former Russian foreign minister the group is definitely arming itself with plenty of international power brokers.

The Vice Chinese Premier Zhang Gaoli said last month, that China will support the development of a new internationally recognized credit rating system that is “objective, just, rational and balanced.”

The group met in Bejing in June, and hopes to create an “Asian” credit rating agency where risk assessment is a significant part of the rating, and one that “suits regional characteristics.”

It’s been revealed Dagong Global, a Chinese domestic ratings agency, assembled the group, but it’s unclear how other Asian countries or agencies might be involved. Apparently, the Chinese government has been discussing the need for such an agency with some of its neighbors, but no further information has been announced.

As always, it’s fantastic to see competition and markets providing solutions, but one has to be cautious when governments are involved, especially top-down, command and control, force-based governments with a poor track record with even the most basic policies like food safety. That said, China though definitely has a reputation to “walk the talk” when it comes to high financial crimes, so it will be interesting to see how this all plays out in the near future.