Thursday 23 November 2017

Restricting the ratings agencies is just a another case of shooting the messengers

Dan White

Dan White

THE move by rating agency Moody's to slash Portugal's credit rating by four notches to "junk" status inevitably raises the question: will Ireland be next?

With the EU and the ECB still in denial about the true nature and extent of the problem on the eurozone periphery, blaming the ratings agencies is a case of shooting the messengers.

Last week Moody's called into question the Portuguese EU/IMF bailout, which was agreed just over two months ago, when it downgraded the country's bonds. Not alone did Moody's slash Portugal's credit rating and raise the prospect that, like Greece, it too might require a second bailout, it unleashed a firestorm of criticism at the alleged irresponsibility of the ratings agencies for even daring to suggest that the Emperor might be somewhat lacking in the clothing department.

Leading the charge against the ratings agency was EU Commission president and former Maoist Jose Manuel Barroso. "Today there is a growing consensus about what can be the proper level of regulation of the ratings agencies," he said. Translated into plain English this means that if the ratings agencies don't toe the line then the EU will spancel them with regulation.

Our own Foreign Minister Eamon Gilmore, a former member of Sinn Fein the Workers Party, also got in on the act accusing the ratings agencies of expressing "straw in the wind" opinions which were based on opinion rather than fact.

Yes, the ratings agencies have a lot to answer for. These were the people who handed out Triple-A ratings to sub-prime mortgage-based bonds that subsequently lost most of their value leaving the unfortunate investors, who bought these bonds on the basis of their Triple-A ratings, nursing huge losses.

The ratings agencies were also far too late in calling the eurozone sovereign debt crisis. The fact that it has taken until now for Moody's to cut Portugal's credit rating to "junk" status, a statement of the blindingly obvious and something which it should have done long ago, merely confirms how far behind the curve the ratings agencies actually are. However, instead of congratulating the ratings agencies for finally bringing their country ratings into line with economic reality and no longer misleading investors, EU leaders are determined to subject them to regulation for having the temerity to belatedly blurt out the truth.

If the EU gets its way not only will the ratings agencies be subjected to new pan-European regulation but they will also face competition from a new, and presumably more "responsible" European ratings agency.

This is insane. While it's not difficult to find fault with the efforts of the ratings agencies, any attempt to restrict their activities would almost certainly backfire. Instead of leading to higher-quality ratings that would find greater trust among investors, the market would almost certainly disregard such ratings entirely.

And as for plans to establish a new, European ratings agency, that's just plain daft. If investors were inclined to disregard the ratings issued by the established ratings agencies if they were subjected to restrictions dressed up as "regulation", then they would completely ignore anything coming from the new European agency. It would be seen, quite rightly, as an EU stooge from the very beginning.

Of course, bashing the ratings agencies is far easier than confronting the underlying issue, which is that Greece, Portugal, Ireland and probably Spain are hopelessly bust.

This week yields on Spanish 10-year bonds hit 5.7 per cent, not far off the level at which Irish 10-year bonds were trading before the country was expelled from international capital in the autumn of 2009.

David Marsh, author of the definitive history of the Bundesbank (and whose well-received history of the euro comes out in paperback shortly), was in Dublin last week.

While he tempered his message for his guests, the europhiles of the Institute of European Affairs, there was no disguising his contempt for the way in which the EU has responded to the eurozone crisis.

In his Dublin talk he spoke of Greece leaving the euro but mused that Ireland might choose to stay the course.

However, in an interview published the following day on the German financial website FAZ, Marsh spoke of the eurozone being reduced to a hard core of 10 or 12 countries -- which is us, the Greeks, the Portuguese, the Spanish and possibly the Italians, Maltese and Cypriots also, out.

And what is the EU doing to either prevent a possible break-up of the eurozone or, if that doesn't prove possible, come up with a credible Plan B to deal with the likely consequences? Unless we are very mistaken, sweet Fanny Adams. Far better, it would appear, to bully and threaten the ratings agencies for, very belatedly, having the guts to tell it like it is than to address the issues staring it in the face.

Sunday Indo Business

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