Cast your minds back just four years; sub-prime mortgages were securitised into investment grade securities; markets were bullish; the financial sector could do no wrong; nations put their capital spending plans on the never-never by issuing bonds and everything in the garden was rosy.

Like the story of the little boy in the tale of The Emperor’s new clothes, somebody started to wonder about the wisdom of advancing money (at a high rate of interest) to people and businesses with less than stellar credit ratings. Surely these people may not be able to pay, if rates went up? Cracks began to appear and eventually the dam burst, casting the world into the global financial crisis.

Rather belatedly, the ratings agencies decided that bad debt, whether securitised or not, was not as good an idea as they had first thought. Next, in light of the deepest recession since the Great Depression of the inter-war years, the ratings agencies mused over whether smaller countries on the periphery of the world’s largest trading block could manage their debts and the sovereign debt crisis was born.

The obvious elephant in the room was that nobody (including the world’s largest economies) could live beyond their means indefinitely and so a new age of austerity has been ushered in. So far, this has been harshest within those countries in Europe that were badly over-exposed to sovereign debt.

As governments have slashed expenditure to meet austerity targets (and avoid being next on the ratings agency hit-list), demand within the global economy has stuttered and some would say, gone into contraction. Now the IMF is warning that drastic cuts should be avoided within Europe’s stronger economies (UK, Germany, France and Italy) since these cuts would be made at the expense of growth. The IMF report points out that these countries can borrow at “historically low” interest rates. Yes, right…

It seems to me that before any pedalling back on debt reduction measures and fresh borrowing is considered, the disproportionate influence of ratings agencies over the fate of sovereign nations borrowing costs need to be properly addressed.