Europe finally stands up to the US credit-rating agencies

July 9, 2011 11:36 am

CashBy Claude Moraes MEP

This week, European leaders finally spoke out against the destructive role of US credit-rating agencies in the ongoing Eurozone crisis.

Why?

Despite the best efforts of a number of EU Member States and international financial institutions, credit-rating agency Moody’s has downgraded Portugal’s credit-rating. Not by a little either, but by a lot: four notches from Ba1 to Ba2. Moody’s offered reasoning was also clear; “…the growing risk that Portugal will require a second round of official financing before it can return to the private market” for essential national funds.

This cannot be a fair assessment. The timing and context of the downgrade might have a disproportionate and destructive affect on an economy which has the potential to get back to positive growth. Plus, anyone who has watched the Oscar winning documentary “Inside Job” will know that US credit-rating agencies have themselves been involved in financial crises, particularly the sub prime mortgage racket which brought the global financial system to its knees.

I was present in the European Parliament for Commission President Jose Manuel Barroso’s angry response to Moody’s downgrading of Portugal. Barroso made the valid point that Portugal has only “just started to implement” the austerity measures required to make the country more attractive on the bond markets. His point was about timing: it is almost certainly too early to tell what further European funds – if any – Portugal will require. There is also every indication that Portugal will bear its austerity measures well. An announcement by Portugal’s new Prime Minister Pedro Passos Coelho that Portuguese families face a huge salary reduction for the month of December saw Portugal’s streets quiet and orderly. With Portugal, it seems the timing of the downgrade was unfairly at odds with the clear efforts of working people who I believe are determined to move back to positive economic growth.

Other prominent Europeans have also made similar points on Portugal’s future fiscal health. German Finance Minister Wolfgang Schäuble went even further than Barroso, saying that “Portugal is … not only completely on course but even ahead of the curve” in terms of measures taken to ensure the country’s future credit worthiness.

Perhaps the real issue here isn’t speculation about the future, but the fire fighting being done now.
In this context, on Monday, credit-rating agency Standard and Poor’s infuriated German Chancellor Angela Merkel by choosing to dismiss current European proposals for a debt rollover in any possible second bailout of Greece as tantamount to default. As these are still merely proposals, Merkel balked, quite rightly pointing out how “…[i]t is important that the [EU, IMF and European Central Bank] do not allow their ability to make judgements to be taken away”. Clearly, she was thinking about that value we should all place on the ongoing efforts of democratic nations and their efforts at institutional cooperation.

Greece, of course, is different from Portugal, and both countries are different from Ireland. The economics causes of their downturn in all three cases are fundamentally different. It is also worth noting that many EU Member States are performing at the top of the global economic league table, for example Germany, Belgium and the Netherlands.

No one is denying the deep economic and social malaise that Greece is in. I for one could not understand why Greece was allowed to adopt the Euro at the time it did. The convergence criteria had not been met and this was a major economic and political mistake which the whole of the European Union must admit to. All the best efforts of Germany and the EU to help Greece implicitly acknowledge as much.

So what is the issue with the main credit-rating agencies? It is clear that they have the power of economic life and death over a small Mediterranean country. This can’t be entirely right and requires careful thought, especially as Moody’s downgraded Greece in June to Caa1, meaning the company feels only Ecuador is a more risky country to which to lend money. A simple point here suffices. Ecuador defaulted 2008, but did not have German and EU backing to the tune of some 110 billion Euros to date.

For Greece, the epicentre of Eurozone problems, there are three clear options on the table: fiscal austerity, restructured debt, and/or default. The third of these is what Europe wants to avoid. The first is causing deep domestic problems in Greece. But as the second is yet to be agreed, or even defined, by Europeans, it does seem odd that such efforts can be so deeply shaken by credit-rating agencies based in New York.

Credit-rating agencies are clearly undemocratic. Their impact is clearly globally disproportionate, at a time European countries which not even begun to implement major austerity packages can be attacked time and again while the United States, the epicentre of the global financial crisis, continues with an AAA rating from the same credit-rating agencies mired by the sub prime scandal.

The role of the credit-rating agencies in the US sub prime crisis is important. Before the crisis, 3.2 trillion dollars were made out in loans to people buying homes on bad credit. This debt was then packaged into investment pools that received the AAA rating from Moody’s and Standard and Poor’s. The credit-rating agencies were clearly wrong to award the highest ratings then, and, with Portugal and Greece now, they are wrong again.

Credit-rating agencies can provide a vital service to investors. Fixed income financial assets – for example government issued bonds – are considered less risky than other forms of investment. Through research and industry expertise, credit-rating agencies confirm this status, rating the risk that anyone borrowing money cannot pay that money back.

This is about trust and the power of those agencies in the financial system. But given the scale and drama of the current Eurozone crisis, the role of the credit-rating agencies is becoming politicised. On this issue, in Europe, credit-rating agencies are granted licenses from the European Securities and Markets Authority (ESMA). That ESMA chief Steven Maijoor recently threatened to revoke those licences should give us all pause for thought.

Perhaps it would be more productive for everyone if credit-rating agencies were stripped of their ability to issue such dramatic downgrades. Certainly, no investor wants to wonder if big issue ratings are in any way the product of rows with political bodies like the EU. One way might be, over time, to encourage a wider pool of such agencies to choose from, perhaps even a market place for dozens, rather than a handful, of fully qualified institutions.

As a British MEP representing the city of London, it is absolutely clear that our economic interests will be massively damaged if these three Eurozone economies – Greece, Portugal and Ireland – are left to fail. For those who want to see a Eurosceptic outcome, the collapse of the Eurozone, they need to understand clearly how this will damage Britain. In the meantime, unfair attacks from companies associated with both the sub prime and global financial crises must be resisted, as they will damage our own economic interests.

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