On Tuesday evening this week, ratings agency Moody’s downgraded Portugese sovereign debt by four notches to a junk bond rating, with a negative outlook meaning further downgrades may be in the offing. Yesterday, the cost of borrowing for Portugal rocketed, as did Ireland’s. Moody’s emailed Bloomberg yesterday who reported “Moody’s Investors Service said today that it continues to “differentiate significantly in terms of the credit profile” in the ratings assigned to peripheral European countries. The rating company commented in an e-mailed response to Bloomberg News request for comment.” So although the theoretical cost of borrowing for Ireland is now at the same level as Greece’s costs in April 2011, there is hope that Ireland can avoid a downgrade – Ireland is presently one notch above junk with a negative outlook on Moody’s scale, so any downgrade would place our bonds in junk territory which would be a step change to our prospects of returning to the bond markets in 2013, as presently planned. You can get an overview of all PIGS (Portugal-Ireland-Greece-Spain) bond prices and ratings on this page. Here has been the reaction in Europe to Moody’s latest action withPortugal.
“Oligopoly” – German finance minister Wolfgang Shaeuble describing the three ratings agencies, Moody’s, Standard and Poor’s and Fitch. Paradoxically forgetting the narrower duopoly of France and Germany in the EuroZone that arguably forced Ireland out of the bond market in October 2010 at the Deauville meeting by suggesting a future EU bailout fund would have precedence in repayment hierarchies, that steels the ECB position on burden-sharing of senior bondholders at Irish banks and of course is exploiting the opportunity of Ireland’s woes to demand changes to corporate tax rates
“So-called clairvoyance” – European Commissioner, Olli Rehn’s office describing Moody’s prognostications for the Portugese economy; as opposed to the forecasting by the EC which has been so robustly on the nose in recent years. At least he didn’t call them amnesiacs who forget things, like Olli Rehn forgetting the second pillar of the Stability and Growth Pact 60% cap on debt:GDP when he threw Ireland to the wolves last year, remembering only the other pillar, the 3% deficit:GDP. And as for the European Commission’s ability to forecast? Isn’t it Olli Rehn that should don a turban, cape and get out a crystal ball? After all, he sees Ireland managing a 1.9% growth in GDP in 2012 when struggling with close to 120% debt:GDP.
“Not immune to mistakes and exaggerations” – European Commission president, Portugese Manuel Barroso. Of course this sounds reasonable enough – after all every one makes mistakes. But the Portugese social democrat could hardly suppress his displeasure towards Moody’s saying “but, of course, to me it seems strange that there is not a single rating agency coming from Europe. It shows that there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe” Indignant, quite. But remember this is the same Manuel Barroso that angrily told Irish MEP and now TD, Joe Higgins in January 2011 “The problems ofIreland were created by irresponsible financial behaviour of some Irish institutions and by the lack of supervision in the Irish market.” AndPortugal’s problems? Well plainly they’re a result of evil rating agencies.
The Great Mystery in Europe at present is why Spain continues to enjoy an almost unblemished Aa2 rating, just two notches below the top ranking. Spain with a 21% unemployment rate, miniscule 0.8% forecast GDP growth in 2011 (and that forecast is from Olli “Gypsy Rose Lee” Rehn), a deficit:GDP of 6.3% and debt:GDP of 68% (but if Spanish banks were to record the same degree of property loan losses as Ireland and Spain bailout them out, that 68% would nicely rise to over 110%). If Moody’s touches Spain in the present climate, it might expect more than yesterday’s hissy fit, but how long can it refrain from stating the obvious?
NAMA Wine Lake 
Remember the perfume ad that used to end with a whispered …..”live the fantasy!”
Rive Gauch maybe.
Ironicaly, since it was a fantasy originating in Paris, the luxury goods drenched EZ “leaders” don’t seem to understand why the rating agencied might be a bit less partial to fantasies than the used to be.
There is an implication in all of this that rating agencies are impartial. That they rate institutions and countries using a standard quantifiable set of criteria and results are not tainted by partiality, political influence or sentiment. Historical patently incorrect ratings have proven this assumption to be false and yet they are still regarded as a reliable indicator of Credit risk. Noting the commentary re Spain and its significantly higher ratint than the rest of the PIGs I suspect that there is a high liklihood of either political influence or sentiment incorporated in the rating factors. Why don’t the agencies provide a clear basis for their ratings with a comparison of the relevant score of the particulra country under each specific criteria? Perhaps such a comparative table does exist but so far I have failed to find one.
Whats the point in separating the Euro chaff from the wheat when the wind is blowing us all the same direction? 12 months ago our 10yr bonds was similar to Spains today, it’s only a matter of time….
Our issue in Ireland is identifying what our ‘chaff’ is.
The whole purpose of ratings agencies is best compared to the sale of indulgences just before the reformation: people pay them handsomely for “salvation”, in this case, a return to the favour of the market, with the measure of blessing bestowed effectively being directly proportional to the amount being paid. Witness Lehman’s and AIG for example, anointed with AAA ratings while being in effect the most insolvent institutions to have ever existed. Ireland and Portugal’s biggest mistakes have effectively been their failure to place enough coin in the the Moody collection box, to buy them BMVs and become closer to God–I mean The Market.
The actual work done and data provided by the ratings agencies is given far too much credit. Their models are not actually mathematically valid in some cases, seemingly mad formulae concocted on excel spreadsheets by people who see little problem adding percentages to nominal amounts, then dividing by GDP per capita or the like. Most of what these people produce is basically numerology.
Long ago, I actually worked with data from ratings agencies–all three I believe. It consisted of assessments of the future prices of ….large industrial equipment, in the next decade or so. You’d get figures between $60 million, and $20 million, but every price would have a decimal place or so of accuracy, e.g. $22.4 million, $31.72 million. Where they were getting such accuracy from was never explained.
I should also mention that none of the values contained uncertainty estimates, i.e. error bars. None. At all. Whatsoever. Having since then come across physics Professor Walter Lewin great maxim that Any measurement that you make without the knowledge of its uncertainty is completely meaningless, I have come to the opinion that that data, and indeed virtually every other “respected” instance of financial or economic data is in fact meaningless.
Clairvoyance doesn’t even come into it. Clairvoyants are careful to be so vague as to be not even wrong. But these ratings agencies are simply just plain old wrong. Their figures are unreliable, inaccurate, and imprecise.
What is needed in Europe, is a Reformation. The question is, who’s going to be the first to nail their theses to the door of the church. My guess is that it will probably be a German again.
Excellent clarification on the process. Now if you can just supply some names of those who should be sent brown paper envelopes before the next review our financial crisis will be fully resolved!!
The attacks on the rating agencies remind me of the attacks on short sellers some time ago. In each case there’s a remarkable combination of denial coupled with an attempt to blame the messenger.