It is not the job of the ratings agencies to support the efforts of major economies to dig themselves out of the holes that they have got themselves into. Nor is it the business of the ratings agencies to support one currency over another. However, it is the job of the ratings agencies to be one step ahead of the game in order to be able to provide frank and accurate assessments of the risks associated with investing in sovereign bonds.
Moody’s have not helped the European sovereign debt crisis, nor the fate of the Euro, by deciding to downgrade Italian debt from A2 to Aa2. The reason that Moody’s cite for the current downgrade (and leaving a negative outlook flag against the Italian economy) is that there had been a “material increase in long-term funding risks for the euro area", due to lost confidence in Eurozone government debts”. They pointed out that “market sentiment” had turned against the Euro.
Whilst market sentiment will push borrowing costs up or down depending on the nature of the sentiment, the ratings agency should not be in the game of making predictions after the fact of a change in sentiment (perceived or otherwise); rather they should be ahead of the curve. The danger is that a rate cut based on current perceptions will only fuel a downwards cycle of confidence which will force borrowing cost up within the Eurozone peripheral economies and the value of the Euro down. The ratings agencies are not supposed to be in the game of writing self-fulfilling prophecies.
The current situation vis a vis sovereign debt in Europe is a mess. It is time for political leaders to draw a line under the problem. They need to make a clear statement that no sovereign nation will be allowed to default, through a concerted support action by the G20. This needs to be coupled with a solemn undertaking to restore sanity in the levels of sovereign debt – starting with the biggest debt mountains in Japan and the USA. One can’t help but think of the Emperor Nero and his fiddle as Rome burned…
Moody’s And The Chicken and Egg Conundrum
Dr. Mike Campbell is a British scientist and freelance writer. Mike got his doctorate in Ghent, Belgium and has worked in Belgium, France, Monaco and Austria since leaving the UK. As a writer, he specialises in business, science, medicine and environmental subjects.