I keep hearing people say 'don’t blame the rating agencies'. My first reaction is why not? After due and sober reflection my considered response is why the hell not?
Standard & Poor’s has put the agencies back into the headlines by downgrading a slew of eurozone governments and robbing France of its cherished triple-A rating. There is something unsettling about S&P’s eagerness to grab the headlines. A cynic might see the theatrical nature of its pronouncements as a rather vulgar marketing tool. Moody’s and Fitch seem a lot quieter.
This time, though, S&P had wisdom to impart. Its serried ranks of economists, analysts and financial wizards were offering startling insights. Fiscal retrenchment, they intoned, would not alone repair the public finances of eurozone countries. The weak economies needed growth in order to revive flagging tax revenues. Wow! Who would have thought it? Perhaps S&P is hunting a Nobel Prize.
I suppose it would be unkind to recall at this point that the rating agencies have been in the vanguard of those telling politicians to pile austerity on austerity, and threatening an instant downgrade for anyone that dared even think about Keynes’ paradox of thrift.
S&P, after all, has also offered us a second searing revelation: the threat to sovereign solvency is not simply a reflection of the deficits and debts of individual states. No. There is also a problem of European governance. The process is cumbersome. The 17 eurozone states struggle to take quick, decisive action.
No one who has watched Angela Merkel, Nicolas Sarkozy and the rest stumble from summit to Brussels summit for the best part of two years could possibly have guessed that the effort to reconcile domestic politics with eurozone economics had thrown up the odd snag. Could they?
I don’t share Sarkozy’s paranoia about Anglo-Saxon conspiracies to insult France and wreck the single currency. Doesn’t Fitch, anyway, have a French connection? French ministers do themselves few favours when they suggest they would be quite happy with a dud rating if only Britain was also relegated. No, the question is why, after their ill-starred role in bringing the financial house down, does anyone still take the agencies even faintly seriously?
Sarkozy is author of his own embarrassment. He treated a triple A rating as an emblem of national virility. His presidency, he is said to have confided, would be "dead” if France were downgraded. All this bestowed on S&P an authority out of all proportion to its worth.
These are the same organisations that stamped triple A on the billions upon billions of junk credit that brought us the financial crash. It must have been coincidental that the banks bundling up this debt were a fast-growing source of business for the agencies. What was it one S&P employee said in a private email when journalists asked awkward questions back in 2007? "We... sound like the Nixon White House.” Given what happened next, the former US president might have considered that something of a slur.
While Sarkozy kept a sullen silence, Mario Monti offered a grown-up response to the downgrades. The Italian prime minister said he could scarcely welcome a triple-B rating. As for S&P’s diagnosis of Italy’s economic challenges, though, it was no more than a rehash of his own publicly-stated views.
The irony is that on the separate question hanging over the eurozone’s capacity to come up with credible answers to the crisis, S&P may well have got it wrong. Again.
Only a fool would say that the eurozone has found a route out of the sovereign debt minefields. There are plenty of potential explosions ahead, not least the possibility of a disorderly Greek default. But it is striking that in the wake of the downgrades, borrowing rates have fallen slightly. S&P has missed a discernible shift in the political dynamic of the crisis. What seemed a few months ago well beyond the collective will of governments now begins to look at least possible.
Merkel has found political space. Hardline opponents of any bailout have fought themselves to exhaustion. Berlin is ready to countenance a boost to the firepower of the new European Stability Mechanism. Merkel can never call on the European Central Bank to act as a lender of last resort to governments, but she seems content with the ECB’s strategy of indirect support through the banking system. German officials also talk about changing the political psychology of the crisis by offering light at the end of the austerity tunnel.
This reflects the progress towards a fiscal compact between the 17 eurozone states. Next week’s European Union summit is expected to endorse a new treaty to turn the compact into law. The entrenchment of fiscal rectitude across the eurozone weakens critics who argue Germany is bailing out feckless southern Europeans.
The speed with which Monti has set about reform in Italy has had something of the same effect. Italy now has a serious government with things to say about economic policy. Monti gets a hearing in Berlin. It would be a stretch to say that this adds up yet to the beginning of a virtuous cycle in the politics of the crisis. But governments may be breaking out of the vicious one in which they have been trapped.
As for S&P, perhaps we should not be overly punitive. After all, all the other villains of the crash have got away scot-free. The second thing I keep hearing, though, is that we must still take the agencies seriously because they remain embedded in the global financial system. Shouldn’t we just downgrade them? Junk would do.
Copyright The Financial Times Limited 2012.