Mr Scissorhands
ON January 13, Standard & Poor’s Ratings Services cut the credit ratings of nine eurozone countries, stripping France and Austria of their triple-A status and triggering new concerns about the region’s financial health.
Since then, the lead analyst in the downgrades has gone largely quiet as he monitors Europe’s next move from a Frankfurt office tower.
Some policymakers have a nickname for Moritz Kraemer: Mr Scissorhands.
Since 2007, Kraemer and a team of little-known economists at S&P’s European sovereign debt team have downgraded eurozone countries 36 times.
Ratings downgrades signal to the world that a sovereign doesn’t have full control of its finances and they make it more costly for countries to borrow money.
The January downgrades once again thrust S&P and rivals Moody’s Investors Service and Fitch Ratings into the limelight. The ratings agencies were heavily criticised after the 2008 financial crisis. A 2011 US Senate investigation reported that ratings agencies downgraded risky mortgage bonds in 2007 having just months before deemed the securities to be comparable to treasury bills. The inquiry also alleged that ratings agencies worried they would lose fees if they gave lower grades for mortgage bonds.
In announcing the downgrade of much of Europe, Kraemer, who declined comment, defended the ratings cuts and criticised Europe’s leaders for not doing enough to address the region’s debt crisis. “The policy initiatives taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone,” Kraemer said at the time.
Colleagues say that is typical of Kraemer. “I’m sure like anybody else he doesn’t like to face such harsh public criticism, but that is part of the role and I think he is the right person for the job during such difficult times,” said Michael Zlotnik, S&P’s former head of EMEA bank ratings who worked alongside Kraemer for a decade up until 2011.
“He doesn’t let himself be dragged under by the public storm.”
Kraemer, who grew up in Germany, earned his doctorate at Goettingen University in central Germany. At Goettingen, his world was far removed from the creditworthiness of the eurozone. He studied developing country economics. His studies and papers encompassed subjects including tropical deforestation and how railway projects could reduce poverty in Africa. “He was very engaged in third-world issues and development economics. That was originally his main interest, how to overcome poverty,” said Hermann Sautter, Kraemer’s professor both at Goettingen and in Frankfurt where Kraemer did his undergraduate studies.
Sautter, who said Kraemer was one of the best students he ever taught, asked him to join him at a new post at Goettingen where Kraemer worked as his research assistant and pursued his doctorate. “I really could rely on him in every aspect and delegate nearly everything to him,” Sautter said. “I had the very best impression of him in a human sense, a personal sense and an intellectual sense.”
Sautter recalls that an ambitious Kraemer completed his thesis in just six months because he had a deadline to start a new role in Washington. Despite the ultra-quick turnaround the thesis “was excellent”, Sautter said.
After a stint in Washington at the Inter-America Development Bank, which provides funding for Latin American and Caribbean projects, Kraemer joined S&P’s London office in 2001 as a sovereign analyst. Within two years, he had become head of S&P’s European analysts before being promoted to oversee Europe, the Middle East and Africa in 2006.
Today, Kraemer oversees a team of a dozen economists from a sober, off-white office on the 27th floor of one of Frankfurt’s tallest office towers.
Kraemer’s eurozone analysts are scattered throughout Europe — and as far afield as Dubai. & Kraemer’s analysts visit the countries they rate at least once a year to meet with political and finance officials, central bankers and transport and union leaders.
When an analyst recommends a rating change, they present their assessment to a secretive rating committee of between five and 10 experienced analysts who approve or reject the change. Kraemer sat alongside Michael Zlotnik, the former head of S&P’s Europe, Middle East and Africa bank ratings team, on various rating committees. “Moritz can be firm and he can be intense” in the meetings, Zlotnik said. “And believe me, such discussions in committee can become very, very intense.”
It is a delicate business that puts Kraemer and his team in a no-man’s land: downgrade too late, and critics charge S&P has moved too slowly. Criticising a country wins the ire of politicians. A downgrade by S&P can create a vicious cycle by ratcheting up borrowing costs for countries already struggling to renew debt. Recently published European Central Bank research said that each one-notch downgrade by S&P between 2008 and 2011 had added some 1% to Greece’s borrowing costs on average.
S&P’s cuts started in earnest in 2009 with Greece, Portugal and Spain in the initial flurry of moves. By 2010, Greece’s credit ratings had sunk to a point where the ECB was forced to change its rules to ensure banks could use Greek bonds as collateral for loans, a move that helped prevent Greece’s financial system from imploding.
In September 2011, Kraemer and his team downgraded Italy by one notch to A/A-1, incensing eurozone officials. At the time, Italian leaders were in the midst of hammering out a budget of cost cutting and wage reforms to stabilise the country. &
Ratings agencies, criticised for being too slow to recognise the 2008 crisis, are now criticised by European policymakers for being overzealous. S&P’s downgrade of Italy in September came without warning — and just three days after rival Moody’s had said it planned to downgrade the country. “You hear on the grapevine that there is a lot of pressure internally [at S&P] to be the first mover,” said one head of sovereign ratings at one of S&P’s main rivals.
According to recent ECB analysis, the downgrade of Italy in September widened the difference between 10-year Italian and German bonds to 4%. That gap today is at 3.6%.
S&P hasn’t avoided embarrassing stumbles. In November, it &mistakenly announced it had downgraded France. The agency subsequently blamed the error on the fact a computer analysis had misinterpreted a change to banking sector information. The error rattled markets, sending the French/ German spread to a record 1.9%.
In December, Kraemer and his team told Europe’s leaders that they needed to take action to reduce the region’s indebtedness. Political leaders angrily disputed the critique. French finance minister Francois Baroin said S&P had ignored a decision by France and Germany to change European rules in order to force eurozone countries to tackle their debt.
On Jan 13, Kraemer and his team did just as they had warned, downgrading the credit ratings of debt issued by nine European countries. France was downgraded from the coveted triple A to AA+. S&P cut the ratings of Italy, Spain, Portugal and Cyprus by two notches. The move put Italy on the same BBB+ level as Kazakhstan, and sent Portugal into junk status.
Kraemer, appearing on CNBC after the downgrade, said: “We are not reacting to political pressure. We are reacting and responding to our published — and what we think, very transparent, sovereign criteria — demands us to do.”
Those who know Kraemer say the CNBC comments sum up his style.
Kraemer’s old professor remains a supporter. “Nearly every week I read negative things in the newspapers about S&P& and Moritz Kraemer,” Sautter said. “I really can’t understand these critical comments because I know Moritz Kraemer as a very responsible, objective man and he bases his judgement only on reliable data. It is not in his nature to be subjective or biased. I completely trust his judgement.”
Those who have worked directly with Kraemer also have a high opinion of him. “He is extremely competent and a first-class expert in government ratings,” said one northern eurozone government official that has regular dealings with & Kraemer. Another described him simply as “normal,” adding he was “quite formal” but “polite and courteous”.
One top Italian treasury official singled him out as one of the few he respected at S&P. “Kraemer used to come until four or five years ago, but since he got promoted he has always sent subordinates. He was always very negative on Italy but he was good — well prepared and competent. The people after him haven’t been of the same quality,” he said.
“He always tended to focus on Italy’s weaknesses rather than our strengths, but he was good.”
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