Europe Declares War on Rating Agencies
EUROPE, 11 Jul 2011
Ambrose Evans-Pritchard, International Business Editor – The Telegraph
A chorus of policy-makers from Europe and across the world have denounced Moody’s drastic downgrade of Portuguese debt as an act of financial vandalism, accusing the “Anglo-Saxon” rating agencies of driving states into bankruptcy and destabilising the global system.
Wolfgang Schauble, German finance minister, said there was no justification for the four-notch downgrade or for warnings that Portugal might need a second bail-out. “We must break the oligopoly of the rating agencies,” he said.
Heiner Flassbeck, director of the UN Office for World Trade and Development, said the agencies should be “dissolved” before they can do any more damage, or at least banned from rating countries.
Moody’s downgrade late on Tuesday set off immediate contagion to Ireland, with dangerous ripple effects across southern Europe. Yields on Irish two-year bonds surged above 15pc of the first time. Italian borrowing costs reached levels not seen since the aftermath of the Lehman crisis in late 2008. Yields on Spain’s 10-year bonds jumped 12 basis points to 5.59pc.
The renewed jitters chilled the torrid summer rally on global bourses. The FTSE 100 slipped 21 points to 6,002, while Milan fell 2.4pc. A quarter-point rate rise in China added to the mood of caution, capping commodity gains.
David Owen, of Jefferies Fixed Income, said concerns are growing the crisis could spread to bigger economies as growth falters across Europe’s southern arc. “The risk of cross-over into Spain and Italy is very serious. The fear is what will happen if Spanish 10-year yields rise above 5.7pc and stay there for a few weeks. Spain also has €2.5 trillion of private sector debt, and a rise in rates risks pushing the country into recession.”
Portugal’s new premier, Pedro Passos Coelho, said Moody’s downgrade was a “punch in the stomach” at a time when the new government has done everything demanded by the EU/IMF inspectors.
The rating said it had little choice once EU leaders began to insist on “burden sharing” for private holders of Greek debt, raising the spectre of default. It is almost certain any Greek formula will be extended to Portugal.
The European Central Bank has cautioned EU leaders from taking a hard line on private creditors, warning it would destroy confidence among the very investors needed to fund Europe’s deficits. The net effect would be destructive. This is exactly what has occurred.
The Institute of International Finance (IIF) representing 400 global banks has floated the idea of a bond “buy-back” on a voluntary basis that would help Greece lower its debt burden, but this has not been enough to satisfy German demands for more creditor pain.
The IFF said yesterday it was studying a “menu of options to help Greece”, including variants of a complex French plan for debt rollovers. The original plan was widely deemed too harsh on Greece.
Jose Manuel Barroso, the European Commission president, questioned Moody’s motives and said it had fanned the flames of “speculation” with an unwarranted downgrade. “It seems strange there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe,” he said, seemingly unaware that Fitch Ratings is French-owned.
The Commission is drawing up laws to clamp down on the agencies. These will now be tougher. “Developments since the sovereign debt crisis show we need to take a further look at reinforcing our rules,” said Mr Barroso.
Go to Original – telegraph.co.uk
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