Euro area officials bemoaning Standard & Poor’s intervention had only themselves to blame.
The credit rating agencies remain a central influence in the sovereign debt crisis because of the extent to which their ratings are institutionally ingrained into the financial system.
The European Central Bank is one of many official institutions that rely on their prognostications — leaving aside the legions of asset managers and pension funds. This is an extraordinary state of affairs, given the dismal job agencies did in assessing the risks attached to sub-prime related debt in the lead-up to the credit crisis.
Since then European officials have repeatedly decried them for exacerbating the downward spiral of confidence in the euro area periphery. There have been mutterings about an alternative, official debt rating institution being set up. Regulation is to be tightened. But little has been done to loosen the agencies’ grip. Each time a periphery nation’s rating is cut, the move sends fresh tremors through the market and further erodes optimism. When will the situation change? One factor to watch out for is the agencies’ assessment of the US Government. If America loses its prime grade triple-A rating, we can expect a ferocious backlash in Congress.