Europe lashes out at credit rating agencies
Europe launched a barrage of fire at credit ratings agencies Wednesday after efforts to resolve the eurozone's debt crisis were plunged into new turmoil by a severe downgrade of Portugal's debt.
European Union officials and ministers reacted furiously after Moody’s Investors Service downgraded Portuguese debt to junk status and warned that Lisbon may need a second bailout.
Europeans were particularly angry over the timing of the ratings cut, just as Portugal begins to implement tough austerity measures in return for a 78-billion-euro EU-IMF bailout agreed in April and as the eurozone struggles to craft a new rescue package for Greece.
European Commission president Jose Manuel Barroso said the downgrade signalled an anti-European bias and suggested it was time for a European ratings agency to emerge as a counterweight to the US-dominated groups.
“I deeply regret the decision of one rating agency to downgrade the Portuguese sovereign debt and I regret it most in terms of its timing and magnitude,” Barroso said.
The agency’s remarks “do not provide for more clarity, they rather add another speculative element to the situation,” he said.
“There may be some bias in the markets when it comes to the evalutation of Europe,” Barroso added.
The downgrade caused the euro to fall and the cost of borrowing for Portugal shot up, pushing up rates for Spain and Italy as well.
The Moody’s announcement followed Monday’s warning by Standard & Poor’s that a eurozone plan to involve private creditors in a new bailout of Greece could amount to a debt default, thereby raising the risk of a damaging domino effect.
German Finance Minister Wolfgang Schaeuble joined the chorus, saying he wanted to sap the power of the agencies and “limit” their influence.
“We must break the oligopoly of the ratings agencies,” he said.
In Berlin, visiting Greek Foreign Minister Stavros Lambridinis denounced the “madness” of self-fulfilling prophecies by the agencies.
But Sony Kapoor, managing director of the Re-Define economic think tank, said eurozone governments should focus on finding a quick solution to Greece instead of taking their anger out on the agencies.
“EU leaders will be well advised to stop blaming ratings agencies for their own shambolic handling of the euro area crisis,” he said.
“While the approach of ratings agencies has been problematic, standing their ground on Greece in the face of political pressure is essential to the restoration of their credibility in the eyes of investors,” he said.
The views of the agencies on eurozone plans to provide a new bailout for Greece will be key and European diplomats say they are in fact being consulted to determine how they would interpret different options being explored.
The eurozone is scrambling to craft a plan in which banks, insurers and pension funds would agree to roll over their Greek debt in a way not considered to be a default by the credit ratings agencies.
“It’s in the interest of everyone, at least the politicians and the (European Central Bank), to come up with a scheme that is not a default and if this requires involvement of the ratings agencies, so be it,” said ING senior economist Carsten Brzeski.
S&P has poured cold water on a French proposal for private creditors to replace Greek debt that is about to mature with new 30-year bonds, saying that such a debt rollover “could result in a selective default for Greece.”
While the eurozone cleared the way for Athens to receive 12 billion euros ($17 billion) from its first bailout and so avoid default this month, it has delayed a decision on the second rescue package until September.
Leading banks were meeting in Paris on Wednesday to figure out how they could contribute to the new rescue package.
The 17-nation single currency area’s finance chiefs will meet again on Monday to discuss the plan but no major breakthrough is expected.