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Archive for July 13th, 2011

It seems to be the nature of things at present in Europe that if one of the four* EU-accredited ratings agencies downgrades a country, the immediate and total-war reaction of European leaders is to adopt a standard toolkit of outrage, cynicism with a tinge of xenophobia. This entry won’t give you a lot of hard information but it might entertain you with the colourful responses over the past year, which when viewed together, look distinctly monochrome.

Greece

In June 2010, Greece’s debt was downgraded four notches from A3 to Ba1 (junk status) by Moody’s and it was the first of the three EuroZone countries to acquire junk status. Our Finnish friend, EU Economics and Monetary Affairs Commissioner, Olli Rehn reacted to the downgrade by describing it as “surprising” and “unfortunate”. The European Commission said the downgrade “again raises issues related to the role of credit rating agencies in the financial system”. The Greek finance ministry was not happy either “the downgrade of Greek government bonds does not reflect in any way Greece’s progress over the past months, nor does it reflect the potential created by the country’s effort of fiscal consolidation and increase competitiveness”

On 7th March, 2011 Moody’s pushed Greek debt deeper into junk territory with a downgrade by three notches from Ba1 to B1. The reaction was mostly domestic in March as the Greek finance ministry claimed the downgrade was “incomprehensible” and “completely unjustified” and “does not reflect an objective and balanced assessment” and the ministry urged a review by the EU of the way in which ratings agencies operate. Olli Rehn chipped in with “The last few days highlight once again how important a more and better regulated environment for ratings are”. In April 2011 as the first anniversary of the first EU bailout in Greece approached, the Greek prime minister lamented the existence of ratings agencies inGreece’s fortunes –  ratings agencies were “seeking to shape our destiny and determine the future of our children” and there was even talk inGreece about prosecuting ratings agencies.

On 1st June 2011, even as the IMF and EU/ECB troika teams were on the ground in Athens hashing out a staff-level agreement to enable Greece draw down its next tranche of the first bailout, Moody’s struck and downgraded the country’s debt from B1 to Caa1, making the junk even junkier. At that stage, it seems there was little point in public outbursts but the timing of the downgrade at what was considered a sensitive point inGreece’s negotiations was noted.

Ireland

Standard and Poor’s downgraded Ireland by just one notch in August 2010. And the response was predictably amusing. The National Treasury Management Agency (NTMA) took the unusual step of issuing a press release and its CEO, John Corrigan went on the airwaves to lambast S&P. There were claims that S&P’s approach was “flawed” and “not realistic”. Then-Taoiseach Brian Cowen (remember him?) chimed in, blaming the “pervasive negativity” in the media. Of course we now know that late summer 2010 saw an alarming outflow of deposits in Irish banks and that politicians, even in August 2010, knew of the probability of the need to seek an IMF bailout. As for NAMA, the estimate on here is that NAMA’s €29bn of bonds are backed by assets worth €5bn less than that at present. So NAMA is nursing a major paper loss. The short term outlook is not so good for the agency inIreland. However, remember the agency has a lifespan of another nine years, so there is time for a turnaround.

As for the downgrade last night, the reaction of the NTMA lacked the incendiary presence of its statements last August 2010, stuck to facts and will hopefully not embarrass itself or the nation by a repeat of last August’s histrionics. The Department of Finance seems to be making up for the NTMA’s wisdom – according to RTE, “it was difficult to see how the decision reflected the agreement of eurozone ministers on Monday”. This is embarrassingly idiotic – if the Department might read the treaty establishing the European Stability Mechanism which its Minister signed on Monday (pictured here at the signing ceremony) which states that for new borrowings from the ESM in 2013, the ESM will rank above other lenders. If the Department might read the Moody’s statement accompanying its decision to downgrade Ireland last night, it might see that Moody’s main reason for its action was that Ireland would need additional funding from 2013. Hopefully the Department might learn from the NTMA and refrain from adventurous statements.

And of course, no downgrade could be complete without a contribution from the EU itself. The president of the European Commission, Portugese Manuel Barroso could certainly not be seen to be standing idly by, especially after his fulsome criticism of Moody’s downgrade of Portugal last week and he has issued a statement, reported here by RTE, in which he says “yesterday’s decision by Moody’s to downgrade Ireland’s credit rating is incomprehensible’”. At least he seems not to have implied Moody’s was involved in manipulating the market; though for interest, the table below shows the prices of 10-year sovereign bonds for the PIIGS on Monday and Tuesday this week, with the absolute movement and % movement. Given that the Moody’s downgrade came some hours after the market closed on Tuesday, you’d have to be impressed at the bond market for pricingIreland against the grain of the other PIIGS – it was almost as if it knew something!

Mon Close

Tue Close

Change

Change %

Portugal

13.38%

12.41%

-0.97%

-7.26%

Ireland

13.20%

13.35%

0.15%

1.14%

Italy

5.68%

5.57%

-0.11%

-1.94%

Greece

17.02%

16.78%

-0.24%

-1.41%

Spain

6.03%

5.85%

-0.18%

-2.99%

Portugal

It’s hard to believe that only four months ago, Portugal enjoyed an A1 credit rating (upper-medium grade subject to low credit risk) and it was 16th March 2011 when that rating was cut two notches to A3 which still wasn’t bad. The reaction was muted. On 5th April, 2011, just three weeks later, Moody’s again downgraded Portugal by one notch from A3 to Baa1. Given that Portugal was on the brink of seeking a bailout, the reaction was again muted and even with a Baa1 rating, Portugalwas still three notches above junk.

An then last Tuesday evening, almost exactly seven days before Ireland’s downgrade last night, Moody’s downgraded Portugal by four notches to a junk rating. And we had the most impressive display of handbag-clutching umbrage so far in this crisis. Olli Rehn’s office accused Moody’s of “so-called clairvoyance”. German finance minister Wolfgang Shaeuble referred to the ratings agencies as oligopolies. And homeboy, Manuel Barroso suggested mistakes, exaggerations, bias and conflicts of interests. Even Greece, which knows a thing or two about junk status labelled the action of Moody’s as “madness

So in the case of Ireland, you can expect a righteous display of hurt feelings for the next few days. But before Europegets too self-righteous, let’s not forget that the EU has a ratings agency of sorts. Remember the Committee of European Banking Supervisors (CEBS), that pan-national EU organization that stress tested European banks last July 2010. And awarded blue rosettes to Bank of Ireland and Allied Irish Banks, concluding that these two banks were capitalized to meet even adverse scenarios? The two banks which a couple of months later, turned out to need €18.5bn of new capital to keep their doors open? Of course the CEBS has been retired. But don’t fret, its replacement, the European Banking Authority (same staff, same building) will be unveiling its 2011 bank stress tests on Friday this week. If you want to see what a politically managed EU ratings agency would look like, you won’t need look far.

And what does the above tell us? Although some ratings agency action is too recent to tell how prescient it is, downgrades that are months old seem to have been on the nose. And national or EU reaction has looked childish and now predictable. Although we can’t prevent our European friends speaking out so kindly on our behalf, perhaps we might restrain ourselves at home, avoid the rhetoric, stick to the facts and get on with it.

*The four are Standard and Poor’s, Moody’s, Fitch and one that many will not have heard of, Dominion Bond Rating Service (DBRS). The first three are US companies and the fourth, DBRS is Canadian. For some reason, possibly because it’s more upbeat than the others, the NTMA publishes DBRS ratings though curiously seems to stay silent about developments with theUS three,

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