Will no-one rid us of the rating agencies?

A chorus of politicians from the European Union and beyond arrived here yesterday, July 6, to publicly denounce the “oligopoly" (the word used by German Finance Minister Wolfgang Schäuble) of the rating agencies.

Now that Portugal's debt has been downgraded to "junk bond" status, the incomprehension, outrage and criticism have been joined by the promise from Wolfgang Schäuble that the EU will “take steps" to put an end to the devastating power of these agencies across the eurozone.

The threat would be beautiful if it were not so worn out. Since 2008, European leaders have been multiplying their bombast against the absurd actions of the agencies, but they haven’t actually done anything concrete to punish them.

While the United States have amended their banking regulations to reduce their power and China, rather simply, has set up a national agency, Europe has never gone beyond pious hopes, reinforcing the impression that fresh ideas and real power have gone off on holiday from Brussels, Paris and Berlin.

Given this vacuum, it’s normal for agencies to thrust out their chests and go looking for ways to kick sand all over the vulnerable euro. What’s in play today are not just the difficulties that Portugal (not to mention Greece) is having in meeting its commitments: it’s also the agencies' tendency to a kind of necrophilia that makes them behave like vultures hovering over the fragile single currency languishing under the southern sun.

Unable to stand up to them, offering new evidence of its confusion to the world every day, Europe responds only when she finds herself on the ropes. For their part, noting the tender fragility of those who swore to fight them, and who also recognise at the same time the losses for private investors looming from any restructuring of the Greek debt, the agencies are responding in the way most natural to them: by piling on the pressure and intensifying their offensive. When politics bow to the organised onslaught of financial capital, there is not much to hope for.

Counterpoint

Don't shoot the messenger

"Not surprisingly, politicians have responded with fury to the downgrading of Portugal's credit rating by Moody’s rating agency. Just about anything at hand, it seems, can be wielded to deflect attention from one’s own foibles. One might say European nerves have sunk to junk level.

"Even Angela Merkel, the German Chancellor, got involved in the fray, stating that she prefers to trust the European Commission, the European Central Bank and the IMF. Her message: don’t take the rating agencies at all seriously. One can’t help but suspect that the politicians prefer to greet the bearer of bad news with the call: “Off with his head!"

"No question, the rating agencies had their stumbles before the financial crisis. They overvalued toxic assets and were complicit in the crisis. Now they are giving the impression that they want to win back their good names with a few critical studies.

"But were the agencies not scolded not long ago for failing to recognise bankruptcies like that of the Lehman Brothers, or for seeing them coming too late? They were caught sleeping – and now they’re rushing in, with too great haste. Something’s not right. But one thing is unarguable: so far, all the downgrades have proven to be justified.

"In addition, Merkel’s demand for emancipation from the ratings agencies is a step down a dangerous and mistaken path. There is a lot of talk of conflicts of interest among the credit rating agencies, because the issuers of debt instruments pay for their own ratings. But no one is talking about a conflict of interest among the institutions that Merkel puts her faith in. The EU and the IMF have thrust hundreds of billions of euros at the fire in Greece alone, even if these loans are backed by state guarantees. Poor pre-conditions indeed for an unbiased opinion on the solvency of states or the need to restructure the debt."

Extracts from the Financial Times Deutschland