Ratings agencies rattle cages in U.S., Europe

By Walter Brandimarte

NEW YORK (Reuters) - The credit ratings agencies are again angering governments, but this time they are taking on the big fish of the world economy.

From Washington to Brussels, Moody's, Standard & Poor's and Fitch have added to the intense pressure on governments trying to deal with crushing sovereign debt.

Their warnings about the precarious finances of the world's top economies have also roiled investors more accustomed to seeing emerging market countries take the brunt of criticism.

Tension hit new highs on both sides of the Atlantic last week as Moody's and Standard & Poor's threatened to downgrade the United States' prized "triple-A" rating.

A few days earlier, Moody's slashed ratings in Ireland and Portugal to "junk" status, triggering an outcry from European officials.

"These opinions, they continue to give them in such a way that it worsens the crisis," Ewald Nowotny, a member of the European Central governing council, said on Tuesday, referring to the agencies. He said markets could live without them.

Now that the agencies are focusing their fire on the rich world, U.S. and European officials -- long proponents of seeing indebted nations "take their medicine" -- are crying foul.

Their complaints carry a strong sense of deja-vu.

In 1998, when Moody's pushed Brazil deeper into "junk" rating territory, the country's finance ministry called the decision a "mistake" that showed the agency needed to invest more in sovereign risk analysis.

In a sign of the turnaround of the fortunes of many emerging economies, 11 years later in its New York headquarters Moody's received a much friendlier Brazilian finance minister, Guido Mantega, to hand him Brazil's much-awaited "investment-grade" status.

The question now is whether the agencies will be able to withstand much stronger political pressures while the debt crisis rages in developed countries.

In Europe and the United States, policymakers have already promised tougher regulations for the agencies after they failed to spot the housing bubble in the middle of the last decade and stand accused of contributing to it by giving generous ratings to subprime mortgage bonds.

Rating agencies came under fire from holders of subprime-related securities because raters are paid by the firms issuing the securities. Investors argued that kind of "economic incentive" blurred the analysis.

Sovereign nations, by contrast, do not shell out any money for their ratings.

That has not lessened the political anger. On Wednesday, U.S. Congressman Dennis Kucinich said: "No nation, agency or organization has the authority to dictate terms to the United States government. Moody's and its compatriot S&P were a direct cause of the near collapse of the economy of the United States."

EUROPEAN RATING AGENCY

In Europe, where the agencies poured cold water on a plan for Greece to extend debt maturities and avoid a default, sentiment is even worse. European Commission President Jose Manuel Barroso accused them of having an anti-European bias.

Barroso and other policymakers want the creation of an European rating agency which, they argue, would be better equipped to analyse euro zone issues. That argument overlooks the fact that Fitch is majority-owned by a French company.

The intensity of Europe's reaction to the latest sovereign downgrades is proportional to the power that ratings agencies retain over financial markets -- a clout that even the ratings agencies suggest is exaggerated.

In a recent special report about proposed regulation changes, Moody's said the agencies should not be seen as "gatekeepers in the financial markets" and their ratings should not be used as substitutes for disclosure by issuers.

WRONG TIMING

Some say policy makers may have a point when they criticize the timing of the downgrades by ratings agencies.

Their failure to anticipate the severe deterioration of sovereign credit was an issue in emerging market debt crises in the past, said Claudio Loser, a former Western hemisphere director for the International Monetary Fund.

"My experience with the rating agencies in Latin America during the debt crisis of the 1980s and 1990s is that they were a destabilizing factor," said Loser, now president of the Centennial Latin America consulting firm.

"They did not warn the markets when they should have and they did actually create more noise when it was not the appropriate thing to do."

Loser believes policymakers will force the agencies to "adjust significantly," and that they will emerge stronger from this crisis.

Greek PM renews attack on credit rating agencies over new downgrade of Greece by Standard and Poor's

Wed March30, 2011 05:42:42
Greek Prime Minister George Papandreou (L) attends a press conference for the meeting of the Progressive Alliance of Socialists and Democrats of the European Parliament in Athens, capital of Greece, March 29, 2011. Papandreou renewed his attack on international credit rating agencies Tuesday after the new downgrade of Greece's credit rating by Standard and Poor's. (Xinhua/Marios Lolos)

ATHENS, March 29 (Xinhua)-- Greek Prime Minister George Papandreou renewed his attack on international credit rating agencies Tuesday after the new downgrade of Greece's credit rating by Standard and Poor's.

The agency slashed once again the country's rating by two notches to BB- from the previous BB+ Tuesday, arguing that Greece will most probably need more foreign aid eventually to overcome an acute debt crisis which led it to the brink of default last spring.

"The decision on Standard and Poor's does not reflect the efforts we make to put our finances in order," said Papandreou during a press conference held in Athens for the meeting of the Progressive Alliance of Socialists and Democrats of the European Parliament.

With the group's head Martin Schulz by his side, the Greek Premier and Socialist International leader repeated strong criticism against rating agencies, "which went from the bubble of euphoria to the panic of risk."

International rating agencies reflect the systemic flaws of the European common currency, Papandreou and Schulz acknowledged. But they also make markets panic without proper justification sometimes, the Greek PM stressed.

"Greece is downgraded not because of its policies, but because EU reaction to the crisis is still considered not bold enough, too little too late," added the Greek leader, noting that a wide gap between markets and politics remains, making people wonder over who governs our world.

Reminding that the same agencies rated positively toxic bonds which created the current international economic crisis, Papandreou raised again the issue of lack of accountability of these agencies and the need that banks bear their burden in the crisis and contribute to efforts to restore growth in Greece, Europe and across the globe.

"Greece aims to fully return to the international markets as early as possible, so we will not have to resort to the new permanent European Stability Mechanism after 2013," he said.

Since last May Greece has not borrowed from international markets on prohibitively high interest rates, but been depending on a multi-billion euro aid package from the European Union and the International Monetary Fund to exit the crisis by 2013 through harsh austerity measures and structural reforms.

Despite progress, skepticism remains amongst foreign analysts in ratings agencies whether Greece will overcome the crisis without further support.

Expressing strong solidarity to Greece over the Herculean task under way, German Socialist Schulz criticized German Chancellor Angela Merkel's stance over the Greek crisis, stressing that "no country within the EU can teach lessons to others and aim development on its own."

Schulz voiced confidence that Greece will exit the crisis, based on the result of the latest EU summit in Brussels last week, "which revealed that more and more conservatives across EU realize that the only way out of the crisis is unity and solidarity."
Editor: Mu Xuequan