And now we play the rating game ...
ON Monday, Finance Minister Michael Noonan appeared in reasonably good form, when interviewed on RTÉ’s Morning Ireland. Ireland’s case for a review of the onerous terms of its bailout package appeared to be gaining acceptance in Brussels, amid a growing sense that the crisis has reached pan European proportions. It was anticipated that the EU and IMF would give the thumbs up to the country, in its latest progress review. Then, along came the US ratings agency, Moody’s, to spoil it all by downgrading the country’s credit rating to “junk” status.
The move was widely anticipated by those in the know, reflecting as it did a growing realisation that a restructuring of the debts owed by Europe’s so called “GIP” group, Greece, Ireland and Portugal, is now all but inevitable.
Yet the downgrading comes despite signs of emerging health in an economy which is predicted to record a balance of payments surplus, this year, on the back of solid growth in exports, a growth no longer confined to multinational firms operating out of Ireland.
The Government here registered its dismay. It was not alone in doing so.
The European Commission issued a hard hitting statement of condemnation.
In Brussels, annoyance at the actions of the three main ratings agencies, Moody’s, Standard & Poor’s and Fitch, has steadily grown in recent months. Question marks are placed over the quality of their research and indeed over their motivation — it is suggested that the agencies may be pandering to people in the markets with a vested interest in shorting the euro, including those who would like to see the whole euro project collapse.
The European Commission now appears to be at loggerheads with the agency following the downgrading to junk status, in successive weeks, of first Portugal, and then, Ireland.
On Monday, the EU Commissioner, Viviane Reding, went as far as to suggest that the rating agencies “cartel” should be “smashed up”, as these agencies were seeking to determine the future fate of Europe.
Germany’s Finance Minister, Wolfgang Schauble proclaimed: “We must break the oligopoly of the ratings agencies.”
The French politician in charge of the EU single market, Michel Barnier, was more measured in his response: “We were surprised that an agency would downgrade a country without any warning. You don’t rate a country the way you rate a company, or a product.” Barnier went on to promise “stiff” measures, next November, aimed at taming the power of the agencies, who would be forced to justify their decisions by revealing the details of the reasons for re-rating the debt of the EU sovereigns.
“I want to have transparency regarding their methods, especially when they are rating countries,” he said.
The move, however, has sparked fears in the financial markets that the EC is seeking to shoot a messenger, who happens to bear bad tidings.
Three years ago, the authorities sought to curb the activities of hedge funds, banning short selling — it achieved little, if anything.
Some argue that it amounts to “an attempt to muzzle free opinion”, in the words of British journalist, Ambrose Evans Pritchard.
EU critics point out that the job of the agencies is to signal default risk- and it the rising risk of default which is troubling the markets, an event brought forward by evidence of rising contagion, leading to Italian and Spanish bond yields being pushed to close to six per cent and beyond, a signal of real danger.
In effect, Moody’s and Co are telling the Europeans to get on with it, to stop squabbling among each other and to come up with solutions, such as a European wide financing mechanism designed to ease concerns over sovereign debt.
The economics writer, Wolfgang Munchau, put it bluntly: “You can always gauge the temperature of the eurozone crisis by the blame game. The fury of the reaction (to Portugal’s downgrading to junk) tells me that the process is in real trouble, once again. Moody’s concluded, rightly in my view, that the messy European Union politics constitutes a reason for concern. Having observed this crisis from the start, I agree. This is as much a crisis of policy co-ordination as it is a debt crisis.”
At the same time, the rating agencies have threatened to downgrade the credit rating of the mighty US, winning themselves few friends in Washington DC, but no small amount of publicity for themselves.
A ratings downgrade has come about due to the lengthy gridlock between Democrats and Republicans in Congress, raising the spectre of a technical US debt default, later this Summer, if no agreement on budgetary adjustments aimed at cutting the large deficit are secured.
Of course, the agencies would be better placed to respond to their army of critics if they had not contributed to the 1990s technology and Noughties property bubbles by giving unrealistically high ratings to companies in these sectors in return for fat fees.
Last Summer, Warren Buffett, whose company, Berkshire Hathaway is the largest shareholder in Moody’s, was summoned to appear before the US Financial Crisis Inquiry Commission which has been examining the credibility of credit ratings.
Many others have been called to account.
The chairman of the US Senate’s Permanent subcommittee on investigations, Carl Levin, has suggested that there is an inherent conflict of interest stemming from the fact that ratings agencies are paid by the banks whose investments they rate (the agencies are not paid by the Governments of Ireland, or Portugal, by the way).
The banks had a vested interest in ensuring high ratings while the agencies were competing with each other for their lucrative business.
The rot can be traced back to the 1970s when the major rating agencies, including Moody’s began the practice of charging bond issuers as well as investors for rating their services — in other words, the raters started earning a fee at both ends of a transaction, placing themselves in a position where there was an obvious conflict of interest between the requirements of either set of clients.
The agencies have come a long way since the mid 19th Century when a gentleman called Henry Varnum Poor first began collecting information on the activities of the railroads, launching an annual manual and eventually expanding his activities into credit risk assessment.
The first financial reports on stocks and bonds came along in 1913. Seventeen years ago, the firm Poors went bankrupt in the wake of the Wall Street crash — which just goes to show that the raters are not immune from events they warn us about.
In 1975, Standard & Poor’s suspended ratings on the bonds of New York city, triggering a bankruptcy in the Big Apple itself and a famous newspaper headline, “Ford to City: Get Lost” after US president Gerald Ford declined to bail out City Hall.
The ratings agencies may be more than mere messenger boys. The Irish downgrade is a setback. The NTMA has admitted as much.
It could be harder for Irish corporates linked to the State such as the ESB, or Bord Gáis, to raise capital at reasonable rates.
Our return to the bond markets may indeed be delayed beyond 2013, as suggested and a second bailout may be required, yet somehow, events across Europe are now moving at such a pace, that such considerations are now secondary.
2013 is a long way away.
CONNECT WITH US TODAY
Be the first to know the latest news and updates
