As the financial crisis that began on Europe’s periphery — Greece, Ireland and Portugal — moves closer to the major economies of the center — Italy and Spain — and now threatens the continued viability of the euro currency, European leaders are scrambling to find a containment strategy. Their preferred course of action: shift responsibility by blaming the Americans.
European officials struggling to prevent the collapse of what has been described as “a giant Ponzi scheme” are angry — very angry — at American credit ratings agencies for downgrading the creditworthiness of several European countries and thus publicly exposing the true extent of Europe’s debt crisis.
Far from acknowledging the self-inflicted nature of Europe’s financial problems, European officials are pointing fingers across the Atlantic, portraying the ratings agencies as part of an “Anglo-Saxon” (i.e., neoconservative free market capitalist American) conspiracy to destroy the euro currency and, by extension, Europe’s broader pretensions to superpower status.
The three leading ratings agencies criticized for being American — Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings, which actually is majority owned by a French company — rate the creditworthiness of companies and countries, as well as the quality of funds and stocks. Their assessment determines the conditions under which firms, banks, or countries may borrow money on the capital markets.
The agencies, which collectively hold a global market share of roughly 95 percent, exert considerable influence over Europe because European companies active on U.S. markets are required by securities laws to have ratings that are issued from these firms.
But European politicians are now accusing these companies of outside meddling, as if American ratings agencies are responsible for the bankruptcy of countries like Greece, Ireland, and Portugal. In a frantic effort to regain control over the narrative that was carefully crafted over many years that Europe is a global model of socialist utopia, European elites (as always in denial), are, once again, reaching for the tried and true fall-back position of anti-Americanism.
The latest bout of anti-American rhetoric was triggered by the July 5 decision by the New York-based Moody’s to downgrade Portugal’s credit rating to “junk” status. The downgrade was made just as Portugal was to implement austerity measures in return for a €78 billion ($110 billion) EU-IMF bailout, and as the eurozone was struggling to craft yet another rescue package for Greece.
Consider, for example, the reaction of Viviane Reding, the European commissioner for justice. Reding told Germany’s Die Welt newspaper: “Europe cannot let itself be destroyed by three American private companies.” She added: “I see two possible solutions: either the G-20 states agree together to smash the cartel of American rating agencies. Or independent European and Asian rating agencies are established.”
European Commission President José Manuel Barroso accused the agencies of “mistakes,” “exaggerations,” “conflicts of interest,” and of having an anti-European “bias.” Barroso asked: “Is it normal to have only three relevant actors on such sensitive issues where there is a great possibility of conflict of interest? Is it normal that all of them come from the same country?”
Attacking the domination of the ratings sector by the Americans, Barroso continued: “It seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe. It is important that we do not allow others to take away our ability to make judgments.”
The unelected Barroso also said it was time for a European ratings agency to emerge as a counterweight to the U.S.-dominated groups: “We know that when there are oligopolies there are sometimes attempts to abuse the dominant position or market manipulation, so the more competition the better — this is our credo.”
German President Christian Wulff said it was shocking that the rating agencies continue to exercise so much power, and warned of the need for policymakers to “re-conquer the primacy of politics.” German Finance Minister Wolfgang Schaeuble said he “cannot decipher” the recent ratings downgrades of Portugal. “We need to examine the possibilities of smashing the rating agency oligopoly,” he added.
European Commissioner for Internal Market and Services Michel Barnier said something must be done to cut the “power and influence” of the American agencies. In true Eurocrat fashion, Barnier also issued a veiled threat: “I invite the agencies, which are under the control of national supervisors, to be extremely careful to fully respect EU rules. They should learn the lessons from the past.”
Greek Foreign Minister Stavros Lambrinidis criticized the behaviour of the agencies as “the wonderful madness of self-fulfilling prophecy” because it made it harder for insolvent countries like Greece and Portugal to borrow to keep afloat. Never mind the “madness” that European leaders have allowed themselves to believe they can borrow forever without ever having to pay back the debt they have accrued.
European Commissioner for Economic and Monetary Affairs Olli Rehn accused Moody’s of “so-called clairvoyance.” Greek Prime Minister George Papandreou said the ratings agencies were “seeking to shape our destiny and determine the future of our children.” As if the rating agencies accumulated the mountains of Greek debt.
Luxembourg Prime Minister Jean-Claude Juncker said the influence of American credit rating agencies was “disastrous.” The Italian chief economist of the OECD, Pier Carlo Padoan, said of the ratings agencies: “It’s like pushing someone who is on the edge of a cliff. It aggravates the crisis.”
German Foreign Minister Guido Westerwelle called for the creation of a European rival to the three agencies. “It is necessary to establish an independent European rating agency. This must be a goal that we all work on intensively,” he said.
Not all politicians in Europe agree, and some have warned that attacking the ratings agencies was a ploy aimed at distracting attention away from deeper structural problems in European economies. Kay Swinburne, a British member of the European Parliament, said: “The EU seems determined to find scapegoats for the current crisis. The problems in the eurozone are predominantly as a result of poor fiscal policies of some EU governments, not because of the decisions of ratings agencies to downgrade them.”
Sharon Bowles, the British chairman of the European Parliament’s Economic Affairs Committee, has also warned against demonizing the rating agencies: “They are being shot as the bringer of bad news. I am not entirely convinced that the [rating] system is broken,” she said.
To be sure, many analysts say the rating agencies deserve much of the criticism that they have received over the past several years. By giving investment grade ratings to American sub-prime mortgage debt, the ratings agencies helped bring about the international financial crisis that the world is still recovering from.
But others say that because of these earlier failings the rating agencies have become more proactive in warning investors of risks facing the financial markets. To rein them in now because they are increasing investor awareness about just how troubled the finances of countries like Portugal, Ireland, Italy, Greece, and Spain have become would be a giant step backward.
Wolfgang Franz, the chairman of the German Board of Economic Advisors, told the Frankfurter Allgemeine Zeitung newspaper that the ratings agencies should be applauded for doing the job they are supposed to do: “Of course the rating agencies failed in the run up to the subprime crisis. But then one should not complain that the agencies are pointing out heightened default risks in government borrowing.”
The ratings agencies, which fear their brand names could be damaged by any suggestion that they are caving in to political pressure, have pushed back hard against the criticism.
For example, the head of S&P in Germany, Torsten Hinrichs, recently defended his record on German public television. He told viewers: “The assertions are completely made up out of thin air and factually wrong. They are either based on ignorance of the facts or are politically motivated comments that neglect the facts. There are about 100 ratings agencies in the world. The importance given to the big three stems from the fact that they have proven to be accurate in their ratings” over a period of many years. Hinrichs added that S&P will not put 150 years of credibility on the line “to enable politically motivated push-ups” of Greece.
Steven Maijoor, the Dutch head of the European Securities and Markets Authority, a pan-EU markets watchdog based in Paris, said Europe wants to break the monopoly currently held by the major American ratings companies, and enforce its own operating regulations. “We shouldn’t blindly adopt the regulatory system of a third country,” Maijoor told the Financial Times Deutschland.
But apart from public posturing, it remains unclear as to what European politicians can really do to limit the influence of American ratings agencies. International investors are unlikely to put much faith in an Orwellian-like European ratings agency that is funded by the state and created for the sole purpose of providing European countries with ratings that are more favorable than the ratings assigned by its American competitors.
In case there is any doubt, there are myriad examples of what a politically managed EU ratings agency would look like. For example, while the big three U.S. credit rating agencies downgraded Greek debt to “junk” more than one year ago, Germany’s Euler Hermes ratings agency currently gives Greece their top AA rating, citing the country’s “very strong business environment.”
Another example involves the European Banking Authority (until just recently it was known as the Committee of European Banking Supervisors), which in July 2010 stress-tested European banks. It concluded that the Bank of Ireland and Allied Irish Banks were capitalized to meet even the most adverse of scenarios. But just a few months later, the two banks needed €18.5 billion of new capital to remain afloat.
European policymakers are now drafting laws designed to curb the ratings agencies by increasing their legal liability, among other things. But a proposal to make the agencies legally liable if a downgrade of a country turns out to be incorrect is facing conceptual problems: officials have yet to come up with a clear definition of the word “incorrect.”
In any case, the new laws are not expected to be in place until the end of 2012. By then, Europe’s financial fate may already have been decided.