Credit rating agencies were hit by a ferocious political backlash in Europe after Moody’s slashed its rating of Portugal to junk, sending the country’s implied borrowing costs skyrocketing to a record high.
EU officials accused the agencies of anti-European bias and signalled that powers could be introduced to suspend ratings on countries that were in receipt of bailouts. The German Finance Minister Wolfgang Schäuble said that there was “no factual justification” for the downgrade, while the Dutch Finance Minister Jan Kees de Jager said that the agencies had poor track records and that Moody’s timing was “strange”.
Mr de Jager told The Times that the European Central Bank had the flexibility to ignore ratings in its decisions on whether to accept Greek bonds as collateral, amid concerns about the agencies’ power to influence official decisions. The furore erupted after Moody’s lowered its rating on Portugal by four notches and said it believed that the country may follow Greece in seeking a second bailout on top of the €78 billion (£70 billion) package agreed in May.
The move could hardly have come at a more sensitive time, given that Europe’s banks are in the midst of negotiations in Paris over their possible role in a second rescue of Greece.
The euro slid in response to the downgrade, losing 0.6 per cent against the dollar to $1.4237 and dropping 0.3 per cent to 89.54p.
Advertisement
Geoffrey Wood, at Cass Business School, said that the EU was “blaming the weather forecaster because it is raining”. Many officials and economists, though, are deeply concerned that rating agencies’ decisions remain hardwired into the global financial system, guiding the decisions of both private investors and official institutions including the ECB, and exacerbating market volatility.
Michel Barnier, the EU’s Internal Markets Commissioner, said that agencies had made “profound mistakes” in the past and that they should be “extremely careful to fully respect EU rules”. He added that the EU could suspend ratings on countries that were in receipt of official aid from the EU and IMF. An official said that the European Commission was considering inserting such a power into legislation on the agencies expected this autumn.
The commission president José Manuel Barroso said that Europe was trying to reduce its reliance on US agencies and that it “seems strange that there is not a single rating agency coming from Europe”. He added that this suggested “there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe”.
Yesterday’s negotiations in Paris made only limited headway, with Mr Schäuble saying that attempts to reach a quantifiable private sector contribution to the Greek rescue “produced no result”. As such, Germany floated a previously shelved proposal that Greece’s creditors should agree to swap bonds for paper with longer maturities.
Mr de Jager said that he had “doubts” over whether a scheme put forward by French banks last week would involve an adequate contribution from the private sector.
Advertisement
He also said that it would be possible for small countries to leave the euro if they decided to — although he did not believe this was in Greece’s interests. “Small economies could leave monetary union without posing too much threat to the whole monetary union, but it’s a very complex process and it will bear its cost for the country itself and the monetary union as a whole,” he said.
“It is in Greece’s interests to stay inside the euro. But they have to be able to perform 100 per cent, without hesitation, the IMF programme.”
Greece’s Prime Minister George Papandreou yesterday warned that violent protests against austerity measures were “mutilating democracy” and creating the conditions for “even more lawlessness” in the country.