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Economist condemns US credit rating companies

The Local · 16 Jun 2011, 09:06

Published: 16 Jun 2011 09:06 GMT+02:00

The director of the Hamburg Institute of International Economics (HWWI) told the Neue Osnabrücker Zeitung on Thursday the agencies were anachronisms from the 1990s, which US regulators had “imposed” on European and other nations.

Straubhaar’s tough words came as Europeans expressed frustration with credit rating company Standard & Poor’s after it lowered Greece’s credit rating to junk bond status, putting it on par with countries like Pakistan.

The lowered rating makes it difficult for Greece to restructure its debt and take other steps to resolve its burgeoning financial crisis, which threatens to overwhelm other European Union states.

The economist appealed to the German federal government to help come up with a new system to end the US companies’ influence, which he said was unsuitable for Europe and created problems.

“These private companies drive policy, and thus produce not more, but less stability," Straubhaar told the newspaper.

Story continues below…

DAPD/The Local/mdm

The Local (news@thelocal.de)

Your comments about this article

09:40 June 16, 2011 by Bushdiver
Will Thomas Straubhaar be singing the same tune when Greece defaults on it's credit lone?
09:55 June 16, 2011 by jg.
Mr Straubhaar maybe missing the point completely. Nobody imposed the credit ratings outfits on anyone. The credit rating companies are private companies that make their living by providing unbiased analysis of various entities who want to borrow other people's money. The banks who are responsible for making such loans decided they needed such advice because the information provided by government bodies is often doctored for political reasons. The credit rating organisations don't doctor their analyses as they need to retain the trust of their clients if they are to stay in business. Any banks, German or otherwise, are free to ignore the reports of Standard & Poors and others - but they don't.
10:20 June 16, 2011 by SmittyBoy
What a paltroon !

Thomas Straubhaar need to do a bit more research before he spouts off. This guy is a 'leading German economist' ?? I fear for German economics students/
10:30 June 16, 2011 by ND1000
If this guy is Germany's leading economist Germans should be worried. His childlike view of freedom and the free market are very shocking. Maybe its the socialism in him that made him say such stupid things? People are free to ignore S&P but they wont because they know there is a lot of truth to it.
10:51 June 16, 2011 by William Thirteen
i suspect this actually part of an ongoing spat between S&P and the European Commission over the use of US ISINs. But anyone who believes that the rating agencies are completely impartial is kidding themselves.

https://secure.wikimedia.org/wikipedia/en/wiki/Credit_rating_agencies_and_the_subprime_crisis

any institutional investor worth their salt will be doing their own due diligence, anyway. Of course, even from the other side of the street one can recognize that bonds for these periphery nations are high risk. In fact, sometimes i find it difficult to sleep at night thinking of all those poor bankers who might lose their hard earned money....
11:07 June 16, 2011 by wood artist
Rating services are just like anybody else who can give you investment advice. You are free to believe what they say, or ignore it, just like Uncle Fred or the guy you met at the currywurst stand during lunch. They may or may not know what they're talking about, although S&P claims to do more serious research.

If that's your only basis for making investment decisions, then you're really setting yourself up for problems. It is, however, one more source to consider. Does this rating make things more difficult for Greece? Quite possibly. Did the Greek government bring this upon themselves? Yup! Can't really blame the messenger in this case.

wa
11:57 June 16, 2011 by pepsionice
Only three observations. The professor suggests that if you only had a German or European company doing this....Greece would be in good condition. I would challenge the professor to find these economists who might suggest that.

Second, the data that these companies use....is open data and the rules are written down to a fair degree how you mark someone up or down. I would imagine that the professor would like to use different rules....which he can do himself, and create his own service. It's obvious that he hasn't taken that step. Wonder why?

Third and final. The same services are also noting that the US is slipping and while Greece is ahead....the US is starting to stumble in that direction. Most Americans trust in these services, and have little doubt about the serious nature of the US economy.
12:55 June 16, 2011 by harcourt
As a complete layman I can see where he is coming from. If a country or bank is in a bit of trouble and one of these credit rating companies with all their expertise, looking further down the road, reduces their ratings. Well then it is almost a self fulfilling prophecy, investors get nervous take avoiding actions thus making the situation worse and then it snowballs. Just a thought !!
13:21 June 16, 2011 by ChrisRea
S&P and Moody's lost their credibility since the financial crisis, if not earlier. Nobel Laurelate Joseph Stiglitz, economics professor at Columbia University put it best when saying "I view the ratings agencies as one of the key culprits. They were the party that performed that alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the ratings agencies."

An U.S. congressional report from April this year reached the same conclusion: "Perhaps more than any other single event, the sudden mass downgrades of (residential mortgage-backed securities) and (collateralized debt obligation) ratings were the immediate trigger for the financial crisis".

There is indeed a need to modernise the system and use some relevant financial indicators. However, no solution was found yet, so serious investors still have to do their own research. An European equivalent rating agency would have to be built with extreme care, so that it would not follow the US-based ones. But let us be optimistic and hope that some smart people would come up with a fully different solution.
13:36 June 16, 2011 by lunchbreak
A bit like killing the messenger eh?
13:52 June 16, 2011 by Murdo Mc Sponge
Yes! If you don't like the message, shoot the messenger. That's been the way in the EU from the start!! Oh yes, and ignore the people too! Democracy is fine when the voters agree with the EU's elite; when they don't, the elite goes ahead anyway!! "Shoot the messenger and sod the people! The EU's motto!
14:03 June 16, 2011 by harcourt
Comments #10 and #11 remind me of the old observation " Is it responsible for someone in a crowded cinema to shout fire when a cigarette butt is smouldering in the corner " !!
14:38 June 16, 2011 by uhrick596
I live in the US, and I believe that the American Financial so called experts have lost some major credability in the past three years along with out wonderful government that believes spending is the way to get out of finanicial problems. I think the professor is exactly right because we cannot even handle our own problems so why would anyone want to listen to what the S&P says. I believe the US is heading to the junk status if our politicians continue to fight while our debt continues to rise each and eveyday. With that said, I think the S&P should stay out of other countries problems and focus on our own problems here.
15:17 June 16, 2011 by derExDeutsche
Herr Straubhaar could just do like the rest of the EU, and stick his fingers in his ears and sing lalalalalalala and allow Greece et al. to accumulate even more debt. hmm. and you're blaming who for debt?

and then what? can we then just do away with anyone over 30 years old voting? ... Because seriously, those fogies over 30 are just embarrassing themselves with all their 'reason' talk ... Don't they know the earth is warming?
18:03 June 16, 2011 by neunElf
A monetary union without a fiscal union, was doomed to failure!
18:05 June 16, 2011 by lwexcel
"With that said, I think the S&P should stay out of other countries problems and focus on our own problems here." ummmmm what?

Just because S&P, Moody's, & Fitch, were founded in the U.S. does not mean that they are somehow negating or benefiting the U.S. by performing a rating analysis on Greece.
18:25 June 16, 2011 by Jack Kerouac
"The lowered rating makes it difficult for Greece to restructure its debt ..."

No, Greece itself makes it difficult for her to restructure her debt. And what does Straubhaar want S&P to do, lie to everyone? Not rate things as they appear on paper because it is inconvenient for those involved in the Greece experiment?
19:30 June 16, 2011 by expatriarch
There are so many false---yet so convinced---opinions here it would be funny if not a bunch of people who, presumably, call themselves adults were saying it. Many push and pull mechanisms operated to "force" US credit rating agencies on European (and the rest of the world) financial dealings. No, none of the US credit rating agencies are in any way unbiased, objective, or even just plain competent. The last decade is irrefutable proof, to those who know, that the US credit rating agencies are essentially nothing but a scam, at best, and complicit in fraud upon the American and world's people, if you still want to pull your punches.

Something people all over don't quite get is that the US is a scam, the whole thing is, essentially, nothing but a big ponzi scheme; and the credit rating agencies play a big roll in it. The idea of private companies earning their living by rating clients on credit worthiness is problematic, at best. Americans don't quite internalize those conflict of interest issues as we live in a society that has had reality skewed by money interests. US credit rating agencies have proven themselves to be nothing more than fortune tellers, telling you what you want to hear to keep your business.

That's just the start; the US credit rating agencies are systematically used to bias markets towards US interests. Americans, especially the people in DC and on Wall St. have no sense for justice, equality, objectiveness, or fairness. They are the kind of people who fight dirty and then call a rules violation on you for every little thing; thing you don't know is that the referee credit rating agency is in their pocket. Europeans tend to be concerned with Chinese possibly being two faced; yet they don't realize the US has bamboozled them so well that they don't even see it anymore how much they are made a fool of.

The US economy is nothing more than a scheme of the wealthy to extract as much wealth out of the US and the whole world as possible and they don't care how wasteful their methods are. Destroy trillions of dollars in wealth so that the wealthy can cream off billions; that is fine by them as long as they don't have to share!

Ideally, credit rating agencies would be legally independent, academic institutions (with room for private institutions) having to compete for pooled compulsory corporate subscription funds awarded by a board of consumer interest and government openness academics and specialists. And all the information would have to be accessible to private individuals free of charge and advanced access to data for commercial use at a significant cost.

US credit rating agencies are already playing the roll of fooling others to dig the USA out of its own ditch with other people's money.Take all of our methods of fooling others into cleaning up after our wealthy's mess and then let us suffer greatly as the wealthy invariably create the next boom-bust cycle in order to extract even more wealth.
19:46 June 16, 2011 by ChrisRea
@expatriarch

While you raise many valid points regarding the current US-based rating agencies (basically that they proved to be deceptive in couple of cases), I believe it is a bit too far to accuse all Americans/all US economy. As in all nations, there are ill-intended people and there are honest people.
20:48 June 16, 2011 by Expat IV
Expatriarch

I began reading your comment but stopped after the first sentence. The tone is pompous, condescending and sarcastic beyond belief. You speak as if your opinion is the only one which counts and the rest of the commenters are idiots. The definition of the word "opinion", if I understand the word correctly, is a person's concept based on his/her personal experience, beliefs, understanding on a subject. By this definition, no one's opinion is wrong--simply different from that of another.

The commentary section of the TL nearly always begins with intellectual comments and discussion which quickly degenerates to put-downs and name-calling. Assuming that the majority of the TL's readers are British and American expats, what does this say about out mindsets?

Yes, I have just descended to the level of preaching--an American fault, I suppose.
21:36 June 16, 2011 by lwexcel
"Ideally, credit rating agencies would be legally independent, academic institutions (with room for private institutions) having to compete for pooled compulsory corporate subscription funds awarded by a board of consumer interest and government openness academics and specialists. And all the information would have to be accessible to private individuals free of charge and advanced access to data for commercial use at a significant cost."

@Expatriarch:

I believe that you have misunderstood the business structure in the United States. Because these organizations are independent institutions (academic or not is another story). However as a counter to that part of the statement there are also private academic institutions in the U.S. (Harvard, Princeton etc.), and these institutions are for profit organizations meaning that although they work with arguably some of the brightest minds in the world they are still out to' turn a buck in the end' so I personally do not see how it matters if it is a company, or academic institution that is providing these ratings.

Secondly, these agencies do provide free information while charging for other services. Anybody can create an account with one of these companies and get a some sort of free information regarding ratings. If you cannot find it there then you can definitely find it in any financial journal or online exchange website. The information is freely disseminated throughout the world of finance.
22:00 June 16, 2011 by mkvgtired
@uhrick596, you said you believe the US is headed to junk territory. Well S&P also warned against a downgrade if our politicians keep fighting and allowing our debt to grow. So, you are saying it is ok to heed some of their warnings but not others? Also, it is not S&P's job to "fix" any problems. They are a private company. A huge chunk of their business comes from rating sovereign debt. No one expects McDonalds, Microsoft, or Boeing to fix American financial problems.

@expatriarch, you are free to start any company you want, or petition a university to launch your free service. An extra opinion would always be welcome. I fail to see how a Greek downgrade is "in the US interest". The US would stand to loose billions (over 100) through its IMF contributions. Not to mention look at what is happening to US (and global) markets because of a looming Greek default. Because they use the Euro, markets from Europe to Asia to North America are significantly affected. Again, anyone is free to ignore these ratings. The reason they do not, is Greece's dire financial situation can be openly verified. For your argument to hold water S&P would be rating Greece higher so markets would not be so volatile. I would recommend an introductory economics course to give you some basis in reality.
06:34 June 17, 2011 by harcourt
ExpatIV #20 : Thats exactly what I was thinking, besides as I've said before in these columns - If you can't put across your point in about ten lines then forget it, most people won't read it.
09:43 June 17, 2011 by MfromUSA
@expatriarch; You have spoken the truth about the wealthy in the US, as well as the fact that the whole system has been carefully retooled, since Ronald Regan, to support the type of greed and dishonesty that is rampant in the American financial system, Wall Street, and of course, the wealthy. The rating agencies are nothing but overpaid hookers. They were giving A+ ratings to banks for days after the banks were seeking handouts from the US taxpayers.

The US financial sector, Wall Street, and the entire system of Capitalism is corrupt to the core, and has taken the entire world to its knees. US capitalists, and US wealthy people will use anyone, any country, any agency to the full extent possible, then spit them into the gutter. Any nation who trusts the US is destined to be used again and again, for the purpose of America taking what it wants, without regard for the needs and wellbeing of the rest of the world.

The US is morally bankrupt.
14:25 June 17, 2011 by dbert4
@expatriarch & MfromUSA - You are both correct. The rest of you seem to have forgotten Enron, Worldcom and a host of others. The auditors and raters were giving them top marks till they failed.

Post-Enron Corporate Governance Developments made using credit service a necessity for European compnaies doing business in the US, Thomas Straubhaar is correct.
16:07 June 17, 2011 by maxbrando
This guy needs to be fired. He wants us to believe that the Emperor (Greece) has clothes on, or for the world to sail by Greece, the Ptompkin's village of the 21st century and pronounce everything beautiful there. his is a most selfish motive. His precious Euro will tank into the deep water when Greece defaults, and he will be just another European jerko..
16:41 June 17, 2011 by Bill Simpson
Ever since they screwed up with that little trillion dollar sub prime real estate loans bubble thing, (they rated all the stuff AAA) any entity that doesn't own shipping containers full of gold bars gets a low rating, just in case anything goes wrong again.
17:15 June 17, 2011 by PhoenixW2
He sounds like a nazi, demanding that the truth be re-written to suit his script.

It takes a political fool to think the markets can't read a credit agencies rating for what it is, and have a drive to 're-write it' into something better sounding.

This is why the EU is a failed state, it is all based upon a lie.
01:42 June 18, 2011 by Pythagoras
Whether Mr Straubhar is right or wrong is besides the point.

The reality is that the US is facing its own financial crisis, which pound

for pound, is actually worse than Greece's.

Given that, and through desperation, they point the finger elsewhere as

a distraction away from themselves thereby providing an excellent

smokescreen that the cause and effect scenarios are in Greece.

Where else but to a troubled, defenceless state of just a few million.

Yeah right!! And this is going to cause a global meltdown?

It will, if we believe S&P, Moodys etc. as something real and rational.

We, the citizen's of the world have to eventually wake up and come to grips

with this reality, and I think this is part of Mr Straubhar's message.

Ignore their selfish driven agendas and let the EU do its work and let

America drift off to the reality that's inevitable for them.
09:13 June 18, 2011 by lwexcel
@ Pythagoras #29

"The reality is that the US is facing its own financial crisis, which pound

for pound, is actually worse than Greece's. " - False!

The U.S. actually has a public debt of around 96% of GDP where as Greece is sitting comfortably at around 145% of GDP. Throw in the mix that Greece has no tax structure, are just now turning employing privatization methods and you will see that Greece is by far, worse off that the U.S. (Pound for Pound). Something that people do not understand is that investors and creditors are not at all afraid of Greece going insolvent they are afraid of the systematic risks that would come from this event. Greece, Portugal, and Ireland have all been given very strict austerity guidelines for receiving bailouts. If Greece defaults on its debt many think that the other countries would begin to perceive this as a valid option for restructuring. Also Greece would be defaulting on its municipal bonds, these are bonds that are covered by banks all over the world, guaranteed by insurance companies all over the world, and re-insured by other players ....again ....all over the world! If this default comes into play these institutions (with or without merit) would in theory begin to hesitate when lending money to countries across the EU (including France and Germany).

With that being said 96% of debt to GDP is nothing to scoff at, the U.S. has to raise taxes while reducing costs, and doing one or the other simply will not due. Perhaps we will be debating over the states a couple of weeks from now, however as for right now Greece is definitely the bigger problem.
01:50 June 19, 2011 by jmclewis
How dare credit agencies stop lying, and rate the debt correctly....... I am certain if asked anyone would love to buy Greece debt notes!
11:39 June 19, 2011 by dirving71
To support your point jmclewis

How dare these credit agencies tell the truth about Greek bonds while letting the US continue to lie to the rest of the world about their bonds--especially when the German banks are in the process of selling off as many Greek bonds as they can to other banks around the world.
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