The EU has only itself to blame for ratings mess

July 7, 2011

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.


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Agreed and well placed!

Posted by Intriped | Report as abusive

Indeed, the ECB is quite smart enough to know whether or not Greece has defaulted. However, they have not the courage to confront what they know to be true.

“Loaning” more non-Greek public money to Greece is morally wrong because only an abject fool would consider the move a profitable investment strategy.

The ECB knows perfectly well that Greece is horribly far from credit worthy, yet they are desperate to give more money to Greece because of the fragility of the European financial system.

That is why the ECB wants someone like Moody’s to give its blessing. In America, a misrepresentation like that is known as “putting lipstick on a pig” to make it more attractive. There were a lot of pigs wearing lipstick here in 2007.

Closing one’s eyes to reality really doesn’t do anyone any favors. Sooner or later, you bump into reality anyway.

Greece should not be allowed to default; they should be forced to default. Poorly managed banks and governments should be forced to suffer the consequences of their bad decisions.

The kinds of reforms necessary in the current financial system cannot occur through gradual evolution because the impetus for change is puny is comparison to the robust impetus for maintaining the status quo.

The current financial system is rotten to its core and unfortunately can only be reformed in the wake of cataclysm.

Posted by breezinthru | Report as abusive

Absolutely right! Furthermore, countries that in the past have taken the truly necessary measures and hence slashed their debt -therefore defaulted and had their credit rating lowered to junk levels – have later come back to the market with better acceptance and good credit ratings because their debt levels are now at reasonable levels.

Posted by luiscatan | Report as abusive

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