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Friday, 25 April 2014

Why stop at ratings?

IFR Editor-at-large Keith Mullin

IFR Editor-at-large Keith Mullin

I SEE THAT Michel Barnier, the European Commission’s internal market and services commissioner is talking about imposing a temporary suspension or even a ban on sovereign credit ratings for countries in the midst of bailout discussions or in IMF programmes. EU officials have said and done some stupid things in and around the sovereign debt crisis, but this latest suggestion goes beyond the stupid into the dark and dangerous realm of State censorship and political control.

Now I’m no great fan of the ratings agencies, as previous comments in this column have shown. I don’t think having them licensed by European markets authority ESMA, as suggested, is in and of itself necessarily a bad thing, but it does put the agencies in a potentially difficult place. (It would be refreshing to see claims for extra-territoriality for once go that way across the Atlantic, but I’d love to know how the EU plans to explain to the US administration any decision to prevent Moody’s and S&P from issuing opinions.)

The agencies have raised the ire of eurozone officials because they’ve been doing things (mainly downgrading peripheral sovereigns) throughout the crisis that officials find unhelpful insofar as they induce fear among market participants, add to uncertainty and create price volatility. But that’s hardly a reason to ban them.

I don’t think for one minute they were responsible for the crisis, as EU officialdom seems to. If you’re trying to fix the debt problem, I can certainly understand that the rating agencies are a massive irritation and aren’t helping. But I’m sure the agencies would say they’re not there to help in that regard.

I think the timing of rating announcements in the past 18 months has looked cynical: witness Spain’s most recent downgrade days before a crunch EU summit when nothing material had really changed and when our esteemed leaders were scheduled to be discussing a solution to the crisis within days.

THE SWAGGERING ARROGANCE of the rating agencies has now reached the point where they’re now telling us what they might downgrade (eg, France, Spain, Italy, Ireland and Portugal if the eurozone goes into recession) in a kind of cheap intimidatory display. They’re certainly trying to make a point of being seen to be on the ball following the roasting they got at the time of the banking crisis of 2007–08.

But love them or hate them, all they’re doing is publishing their views as to the likelihood of timely repayment of debt obligations. And in a debt crisis in which investors and banks hold hundreds of billions of dollars in peripheral European sovereign debt obligations and are paid to generate positive returns for their clients, maybe it’s not a bad thing to have.

My problem with rating agencies is actually not the agencies themselves; it’s the way in which certain, or perhaps most, market participants treat sovereign ratings and ratings changes, which is a completely different issue.

The agencies have wheedled their way into incredibly strategic positions in a financial markets industry where far too many people lack the wit to think for themselves and so blithely hide behind third-party viewpoints. “Ratings upgrade = buy. Ratings downgrade = sell” is taped to screens across the world’s dealing rooms. Or glued to the foreheads of those who can’t work the tape dispenser.

It’s not just the financial industry that is obsessed with ratings; it’s regulators, supervisors and politicians, too. President Sarkozy is partially basing his re-election campaign on keeping France’s Triple A status as a sign of Gallic machismo and achievement, while eurozone governments state publicly that the European Financial Stability Facility has to keep the top rating if it’s to leverage up and play its new role of first-loss debt guarantor. This role is not just a matter of giving back primary bond market access to peripheral sovereigns; it’s doing so with the positive spread arbitrage that only Triple A ratings can infer.

My problem with rating agencies is actually not the agencies themselves; it’s the way in which certain, or perhaps most, market participants treat sovereign ratings and ratings changes, which is a completely different issue

IF THE EUROPEAN Commission wants to hermetically seal dud sovereigns from harm, why stop at banning sovereign credit ratings? It should ban investors from selling bonds of entities in restructuring or that might potentially move into restructuring. And while Barnier’s at it, why doesn’t he ban sovereign credit strategy research by banks and brokers, etc. Or ban trade ideas that espouse negative views around sovereign work-out situations or that otherwise infer selling bonds. If you’re going to ape the Soviet Union, you might as well go the whole hog.

Oh I’ve thought of another one: the best way of dealing with a sovereign debt crisis and stopping people in a democracy having the audacity to express an opinion at an inopportune moment is not getting into one in the first place. Greece is in the position it is, not because of the rating agencies, CDS, currency swaps, short-selling, evil vulture funds, reckless hedge funds or the proprietary traders, but because of a political class that is desperately trying to lay blame at its door.

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