In an interview with the Sunday Telegraph, the head of Fitch’s global sovereign ratings David Riley said, “The impression might be that if we downgrade Spain, or whoever, we’re cutting them off and making their situation more difficult. Yet, at the same time, we hear a lot of people saying ‘you’re late to the party, the market’s already there, it’s irrelevant what you’ve done.’ We can’t be both. We can’t be all-powerful and irrelevant.”
He continued to explain the idea that rating agencies, “create the crisis that you’re predicting” was impossible and he denied that any decision could create “a self-fulfilling crisis.” He said, “If you owe 1 trillion and your cost of funding increases permanently by 10 basis points, it adds up. But there’s no evidence that the impact is so great as to push what was a solvent liquid entity into insolvency.”
Frederic Drevon, Moody’s head of Europe, Middle East and Africa, echoed Mr. Riley’s thoughts. He said, “If there is a negative environment and we downgrade, we will be told you are contributing to the events as they are happening. But the reality is we have to make the calls as we see it.” He added, “You will have many people who agree and disagree…That’s the way we operate. We are open to criticism.”
Dissatisfaction with rating agency decision-making has led major European Union (EU) banks to intensify talks about reducing cooperation with Standard & Poor’s, Moody’s and Fitch.
Sky News reports that widespread frustration has caused executives “from about a dozen of the Continent’s biggest lenders” to discuss the issue informally during the Institute of International Finance in Copenhagen.
Nothing was agreed to, says Sky News. But they quote an unnamed source as claiming that, “things are certainly moving in that direction.”
They also quote a senior bank executive as saying, “The ratings agencies got it horribly wrong on the way up; there are lots of reasons to suppose they are getting it wrong on the way down.”
The rating agencies have been aggressive in downgrading both EU banks and their countries’ sovereign debt. And it is expected that Moody’s has planned yet another downgrade for Barclays, Lloyds Banking Group, and Royal Bank of Scotland.
The long list of countries lashing out at rating agencies for lowering sovereign debt ratings has gotten longer. Now India has joined most of the EU and many others in criticizing Standard & Poor’s (S&P). India’s complaint centers around an S&P report saying that their country could be the first BRIC (Brazil, Russia India and China) country to loose its investment grade rating.
The Business Standard quotes Union Home Minister P. Chidambaram as dismissing the report by saying, “I think we tend to overreact to rating, as you see in reports. In fact, some of these rating agencies have very poor records in the past. I think we need not see reports of rating agencies as the final word on the country’s economy.”
Mr. Chidambaram supported his position by pointing out how India survived the challenge they faced in 1991 and again during the Asian domestic crises in 1997. Today’s challenges, he believes, pale in comparison.
He agreed that inflation was too high, but blamed the problem on high fuel prices. The Business Standard has him explaining, “High crude oil prices are fuelling the price rise compounded by the fiscal deficit and the current account deficit. We have controlled inflation. We believe crude oil prices will moderate in coming months and gradually, inflation will come down.”
Fitch Chief Executive Paul Taylor told Dow Jones Newswires in an interview at the Institute of International Finance conference in Copenhagen that the currency union is still “muddling through” its debt problems.
Bloomberg also reports that at the same conference Mr. Taylor struck out at governments trying to rein in ratings agencies. “There are too many politicians talking about ratings from my point of view at the moment…There must be some advisers around that should be talking to some politicians about being less vocal about ratings.”
Placing a burden of proof on agencies, Mr. Taylor said in a question and answer period, would “completely blow up the system”. Mr. Taylor also repeated the long-held position that rating agencies do not offer expert advice. “We’re not really a financial institution,” he said. “We’re more like a publishing house.”
Remarks made at the same conference by Standard & Poor’s President, Douglas Peterson, were more accommodating to governments seeking greater control over rating agencies. Bloomberg reports him saying, “The rating agencies can play a role in ensuring that there continues to be transparent information provided by those securities in a way that is done under strict standards of governance and control.” Relying on rating companies will help provide “consistency,” Peterson said.
Turkey has joined a chorus of countries accusing rating agencies of unfair and unsubstantiated rating decisions.
Standard & Poor’s (S&P) revised its outlook on Turkey from positive to stable. The Famagusta Gazette reports Turkish Prime Minister Recep Tayyip Erdogan as saying that the move is “… totally an ideological decision. No one would buy that. And we shall declare that we do not recognize you [S&P] any more as a credit rating agency.”
The Prime Minister continued, “It increased the rating of bankrupt Greece and cut our rating. Isn’t this nonsense? This is totally an ideological approach. No one can believe this. You cannot fool Tayyip Erdogan.”
Turkey’s Deputy Prime Minister Bulent Arýnc also described the decision as “unjust and baseless.” Arýnc said the rating agency holds incorrect data about the Turkish economy.
The rationale S&P provided for its revised outlook included, “less buoyant external demand and worsening terms of trade [which] could inhibit Turkey’s economic rebalancing.”
Don’t blame the weatherman for the weather…
The Chinese rating agency, Dagong, is opening an office in Milan. It is a joint venture with a private equity group, Mandarin Capital Partners.
The Italian business daily, Il Sole 24 Ore, reports that Dagong has hired former Fitch executive Marco Cecchi di Rossi to launch the start-up, and the office intends to apply for authorization through the auspices of ESMA by summer.
Initially, the office will have 10 analysts. They will oversee securities issued in France, Germany, Italy, and Spain. Within five years, they intend to have 30 analysts, a 5-10% market share, and a turnover target of 9 million euros.
Dagong assessments are currently not considered outside of China; the agency has been sharply critical of western nations’ sovereign debt, particularly the United States’. I’m sure we will get transparency from a Chinese rating agency.
The Treasury Committee of British Parliament conducted its third inquiry session with executives from the rating agencies, Fitch, Moody’s, and Standard & Poor’s.
The Financial News reports that the committee chair, Andres Tyrie, began questioning by asking Moritz Kramer, managing director and head of the sovereign ratings group at Standard and Poor’s for Europe, the Middle East, and Africa, if Standard & Poor’s had made a $2 trillion miscalculation in their rationale for downgrading the U.S. sovereign debt.
Mr. Kramer denied there was a mistake. Rather, he blamed the discrepancy on two models used to measure U.S. deficits in upcoming years. Mr. Tyrie’s follow-up question cited Finland’s AAA rating and asked whether the U.S. had less ability and willingness to pay its debt than this small sub-arctic nation.
Mr. Kramer essentially said that yes, he believed Finland to be a better risk than the U.S. and justified his opinion on the political turmoil in Washington.
The Financial News said that hostile questions and terse answers continued throughout the session.
Reuters reports Markus Krall, a partner at Roland Berger Strategy Consultants, as saying, “Following intensive talks conducted across Europe, a number of financial companies have now agreed to support the establishment of a global rating agency of European origin.”
Mr. Krall anticipates that they will soon be concluding fundraising and beginning “operational realization”.
Mr. Krall will be resigning his senior position with Roland Berger to become the founding chief executive of the new agency.
During the Eurozone debt crisis, the American rating agencies, Fitch, Standard & Poor’s, and Moody’s were criticized by Europeans for being too quick to cut sovereign ratings despite bailouts and austerity measures.
The Bertelsmann Foundation is also attempting to launch a non-profit rating agency that would use a yet-to-be-developed model for rating sovereign debt.
Philipp Roesler, Germany’s vice chancellor and economy minister, wrote in an op-ed piece that appeared in Die Welt that “To stabilize the euro in the short term there can’t be any taboos…That ultimately includes Greece’s orderly insolvency, if the necessary instruments are available.”
This is a significant break with German Chancellor Angela Merkel’s calls for patience in dealing with the ongoing Greek debt crisis. Other senior European and German officials also insisted a Greek default was not being considered as a viable alternative.
The credit-default swaps market project a greater than 90% probability that Greece will be unable to meet its obligations. And the Greek government estimates that they only have enough money to keep operating for approximately two weeks.
The speculation that the Germans and others in the European Union will not extend additional support to Greece has caused stock values for France’s three largest banks that are heavily invested in Greek bonds to fall dramatically. Likewise rumors that Greece will be forced to give up the euro has led to speculation that other countries in trouble like Spain, Portugal, Italy and others could also be pushed out. This has caused the value of the euro to fall precipitously.
PFitch Ratings President Paul Taylor addressed the feasibility of a three-day warning period before changing a country’s sovereign debt ratings. Among other issues, Mr. Taylor worried about insider trading. He told a panel of British lawmakers from Britain’s upper chamber of parliament, “One of the leakiest areas in our business is sovereign ratings…if you inform the Greeks of a rating decision you get phoned up by the French. Countries tend to talk to each other.”
Taylor also claimed that the ratings agencies’ power is overstated. Instead the lawmakers should focus on the business press. Reuters reports Taylor saying, “It’s overstated, the power we have in markets. A lot of that comes from the press. The financial press in particular loves the idea we wave our wand and magic things happen.”
Currently countries are given 12 hours to challenge any factual errors, however the Europeans are exploring the possibility of expanding that to three days. The politicians are looking for a longer grace period to avoid wild swings in bond prices while bailout packages are being negotiated.
This is pure folly. You can never regulate volatility.