Dominique de Villepin has just made the short flight to Hong Kong from Manila, where he witnessed first-hand the economic growth that led Moody’s to join its peers in upgrading the Philippines to investment grade status.
The former prime minister of France spoke highly of the country and its people but, as a sign of things to come, offered a more practical assessment. “More needs to be done, of course. For example, there are still terrible traffic jams”.
It was a happy coincidence that we should be speaking in the week of the Moody’s upgrade because ratings and regulation is a topic de Villepin – or the Prime Minister, as he is still called – cares about passionately.
De Villepin asserts that, while wealth is shifting to Asia, far too much regulation originates in the west and the major credit ratings agencies responsible for steering investors through the myriad of instruments and products - which are based in the US - need help.
“Who is deciding how we should organize the world economy is really a question that has to be raised,” de Villepin said. “The information is very much in the same hands, and very much there is an imbalance”.
It could be argued that de Villepin has vested interests.
He is chairman of the international advisory board of Universal Credit Ratings Group, a Hong Kong-based joint venture between Dagong Global Credit Rating Agency, which is China’s biggest ratings agency, Russian group RusRating, and Egan-Jones Ratings of the US.
However, De Villepin, prime minister of France between 2005 and 2007, has never been one to duck an issue. In 2003, as foreign minister, he famously opposed the Iraq war amid overwhelming pressure to take action, led by the US.
He is therefore no stranger to opposing the prevailing winds.
“Of course the ratings agencies had a role to play but that role was part of the existing system, which [I] believe is unsound and does not serve the needs of a healthy global economy.”
“Basically, the main reasons for the [financial] crisis in 2007/2008 are still there,” he sighs.
In 2008 the global financial system imploded. Stock markets plunged, banks collapsed, governments teetered and savers panicked. As a result, the regulatory landscape is still being redrawn and “too big to fail” has entered the popular lexicon.
Not only did regulators and credit ratings agencies not see it coming, accusations flew that they contributed or even caused the whole mess by mis-rating the kind of securities that brought the system to its knees.
Five years on and, according to de Villepin, plus ça change.
“Everything is still the same. The big privileges of the west are still there. The [Big Three ratings agencies] are having a strong hand on the market, which gives to the US a strong capacity to decide what is good and what is not good.”
He says that the regulatory landscape does not reflect the reality of the world’s economy, which is a shift in wealth and investment to Asia.
As part of the framework, and although there are numerous small local ratings agencies in the region, the dominance of the Big Three is absolute. Therefore, moving away from a US-centric ratings environment is important.
“We are still seeing the economy with this old eye, which is not adapted to the current situation,” he laments. “Of course you can look at the world’s economy with just one eye but you are not going to see exactly what needs to be seen.”
Calls for a pan-Asia regulator to challenge the Big Three have increased of late, most recently – and somewhat ironically – from Cesar Purisima, finance minister for the Philippines, which was promoted to “investment grade” by the Big Three this year.
“The region needs a regional credit rating agency that understands the region; that is not looking at a methodology that is geared towards the old model of the western world,” he said at FinanceAsia’s annual Borrowers & Investors Forum, Southeast Asia, in Singapore in October.
However, as yet such calls have not been met with action, which is something de Villepin hopes to change with UCRG.
The stated aim of UCRG is to compliment the US-based Big Three and provide a more Asia-centric voice regionally and globally, an ambition the former PM clearly has lots of energy for.
Set up in June, the whole has yet to become more than its constituent parts and UCRG as a group has not given a rating to anything while awaiting a licence: but the philosophy is sound.
Rather than rely on a single rating, de Villepin proposes an alternative approach that, he believes, will stand a better chance of assessing the complex structured products that brought the world to its knees 5 years ago.
“How do you assess the situation of a Russian bank? How do you assess the situation of some important state-owned companies in China?” he asks.
The group’s mantra is a dual rating system, which is a combination of a global rating and a local rating – one rating by a country-based agency (an equity member of UCRG) and one international rating by UCRG.
De Villepin insists this will take into account many more factors than the Big Three consider at present, including an assessment of the local environment and the political factors rather than just the business and investment risk.
The purpose is to restore trust in a system that “created absolutely crazy new tools, such as the subprime [US mortgages]”.
He appears agitated when talking about these tools, saying that, in trying to rationalize new products, some toxic products were created and, ultimately, toxic banks. This, he acknowledged, has not made things easy for the ratings industry.
“The kinds of activities that take place in the securities trading firms, particularly those in the so-called ‘bulge bracket’ [the collective noun for the world’s biggest investment banks], are too complex and too opaque for any rating agency to assign a credible scoring,” he says.
How investors navigate these murky waters is not only key to financial markets but, as was hammered home since 2008, the global economy.
His ire is not reserved for products and how they are rated. A large part of the problem as he sees it is that regulation drawn up and policed from the west, focused mainly on products and services created in the west, will not benefit the majority.
“If there weren't the globally prevalent view that the world's most powerful nations had some kind of Divine right to make up rules for their own advantage, then certainly it would be much easier for other nations to accept more rules at the international level.”
De Villepin – along with German chancellor Angela Merkel among others – calls for an international financial regulator to sit within the auspices of the United Nations, with the power to police world markets and “organize the global economy”.
“I think it is in the world’s interest, even in the US interest, to create a new structure that is going to be able to take decisions in a better way. Such an institution must be vested with the appropriate global tools and powers. Things cannot depend on one country.”
By single country, de Villepin is of course again referring to the US. And his eyes light up when the subject takes a more nationalistic slant and he draws comparisons with another empire closer to home.
“One of the first voices in the world advocating change in the financial system and the economic system was General Charles de Gaulle [who founded modern France and served as its president from 1959 to 1969]”.
“[He] believed that above the interests of some countries were the interests of the world, and I think that [can be] very much adapted to the current situation.”
In the end, it boils down to trust: the trust investors have in the financial system, how it functions, is regulated and rated. And investors are much more likely to trust if they have the most complete information at hand, which is where the ratings agencies rule.
“If you have a lot of money today, where do you put it? You cannot use the same answers from 5, 10, 20 years ago. [Investors] don't just want to watch the TV in the morning and be told what has already been decided by the Federal Reserve or President Obama”.
