Fitch Triggers Brief Sterling Slide

By: Mike Campbell

The unfettered power of the ratings agencies is likely to come in for further scrutiny after a report issued by ratings agency Fitch caused Sterling to fall by a full percentage point. Sterling later recovered much of the loss, but it illustrates the undue influence that these agencies can have in the Forex market. The function of the ratings agency is one, in principle, of intelligence gathering and analysis. The agencies make their money from corporations that wish to issue bonds, or use other financial vehicles, to raise capital, paying a fraction of a percent of the value of the bond issue for the privilege. The rating that the agency gives to the issue tells investors (in essence) how likely the issuing corporation is to default on the issue, so the investor can evaluate risk before proceeding.

When it comes to prognostication about the credit worthiness of a sovereign state, things become a little murkier. Nobody (not even the most bitterly disappointed Labour voter) seriously thinks that the UK government will be unable to honour its financial obligations, and in fairness, Fitch never suggested it was the case. However, merely by pointing out that HMG faced a “formidable” challenge in cutting the UK budget deficit (a fact that we all know) Sterling stumbled. You don’t need to be a financial analyst to say that the same is true for the economies of Japan, America, France and even Germany whose problems are nowhere near as severe. Germany recently announced austerity measures designed to cut €80 billion from public spending over the next four years. Germany wants to realign its deficit with the maximum permitted level of 3% under Eurozone rules, but any austerity plans are going to hurt some sectors of the community and are universally unpopular. Will the credit ratings agencies be pointing these facts of life out next?