The EU has only itself to blame for ratings mess
By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Europe has only itself to blame for the mess created by the ratings agencies. Luminaries including Jose Manuel Barroso, the president of the European Commission, and Wolfgang Schaeuble, Germany’s finance minister, have lambasted Moody’s for downgrading Portugal. But Europe has wasted many chances to neuter the power of credit ratings agencies. Instead they choose to fetishize them. An especially stark instance can be seen in the European Central Bank’s current approach to Greece.
For years it has been apparent that the financial world pays far too much attention to the three big ratings agencies — Moody’s, Standard & Poor’s and Fitch. They should be treated like any other opinion in the market. But their special position allows them to create havoc. It is not just that investors hang on their every word, they are also embedded in the system for regulating banks and other official mechanisms. Yet the agencies are often too slow to spot trouble, with the result that borrowers are able to run up excessive debts. And when they do change their minds, they can help provoke a stampede.
One might have thought that policymakers would have got the message after the dot-com bubble burst in 2000 triggering a corporate debt crisis. But no. One might have thought they would have twigged after the credit crunch. But no. Sure, it’s hard to tell private investors to stop paying the agencies so much attention. But central banks and bank regulators could have cut them out of their thinking. Despite endless discussions and some half reforms, nobody in power embraced the radical option of treating the agencies just like any old analyst — and often a bad one.
The most glaring mistake has been the ECB’s decision to link the resolution of the Greek crisis — and, by extension, potentially the future of Europe — to what these agencies think. The ECB says it won’t accept Greek government debt as collateral if agencies take the view that Athens has defaulted. Such a threat, if carried out, could bankrupt the Greek banking system, which relies on such collateral to fund itself. As a consequence, it could cause chaos throughout the rest of the euro zone.
But the ECB shouldn’t rely on the agencies to tell it whether Greece has defaulted. One might have thought it was smart enough to form its own view. Given such an abdication of responsibility, it’s no wonder everybody else bows down before these false demigods. And then Europe is left complaining. It is an inconsistency, and a malaise, that beggars belief.