The "Big Three" credit rating agencies can determine the fate of entire countries, by deciding whether they are creditworthy or not. Now Portugal is under pressure after Moody's downgraded its debt to junk status. European politicians want to create an alternative, even though they helped give so much power to the agencies in the first place, Spiegel Online reported.
Strange as it may seem, there are still credit rating agencies that give cash-strapped Greece top marks. The experts at Germany's Euler Hermes Rating currently give the Mediterranean country their top AA rating, citing its "very strong business environment."
And there is little doubt that Euler Hermes can be trusted. It is the first rating agency that officially meets the tougher European regulations for the industry that were introduced at the end of 2010.
There is only one problem: Their good rating for Greece is not related to the creditworthiness of the state, but to that of Greek companies. When it comes to rating sovereign bonds, that is still done almost exclusively by the three major rating agencies -- Standard & Poor's, Moody's and Fitch -- who are collectively known as the Big Three.
That is something that European politicians have long wanted to change, and there have been repeated calls to set up an independent European rating agency. Now the European Union is working on its proposal for what such an agency could look like.
Downgraded
The influence of the Big Three could clearly be seen in the heated reaction to Standard & Poor's announcement earlier this week that it might classify a planned restructuring of Greek debt as a default. Their decision seemed to cast doubt on the prospects for a complex plan to participate private creditors in a new bailout for Greece.
Portugal's future, too, appears less secure after Moody's downgraded its debt to junk status on Tuesday, warning that the country might need a second bailout before it could return to the capital markets. The move could mean that Portugal will have to pay a higher premium to attract buyers for its debt.
But why are European politicians and investors still so dependent on the opinions of three private companies based in New York and London? After all, the Big Three were the subject of massive criticism in the wake of the 2007-2008 financial crisis, because they had awarded top ratings to highly risky financial products in the run-up to the crunch. Since then, politicians have repeatedly called for measures to curb the agencies' power. Most recently, German Chancellor Angela Merkel commented on Tuesday, in relation to Standard & Poor's announcement: "Regarding the issue of rating agencies, I think it is important that we do not allow others to take away our own ability to make judgments."
But so far there have been few visible results from the politicians' rhetoric. One reason is that politicians are partially responsible for the ratings mess that they are complaining about.
On the one hand, the sovereign debt crisis has turned Europe's politicians into pawns of the rating agencies. For decades, the agencies have been assessing the creditworthiness not only of companies and financial products but also countries, giving them a mark from the top AAA rating to D for default. Now that it is Europe that is gripped by a debt crisis, as opposed to Asia or South America, governments on the continent are feeling the power of the rating agencies as never before. The agencies can decide whether a country's debt is worthy of investment or not, arguably giving them the power of life or death over whole states. Read more.
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