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Ratings agencies under notice, part 2

Ratings agencies | Jean Claude Trichet Discusses Ratings Agencies and Greek Bailout Anthony Harrington

In Part 1 we looked at EU President Barroso’s warning to the ratings agencies. A day after President Barroso’s speech, Jean Claude Trichet, the President of the European Central Bank faced some hostile questioning from the world’s financial and political press (see the webcast) and the subject of the ratings agencies again came to the fore.

Unlike President Barroso, however, Trichet did not venture voluntarily into this particular battle. He was pushed and prodded into it by repeated questioning from the press, who seized on one small point he made during a press conference whose main purpose was to communicate two things: one, the reasoning behind the Governing Council of the ECB’s decision to keep rates on hold, and two, the fact that the ECB had “personally” looked at and approved the Greek remedial plan (austerity measures, to you and I) and given its go ahead for the bail out.

The point that the press pulled on and worried like a terrier with a bone was that the ECB had decided to accept Greek collateral from European banks who were tapping the ECB for money. Great, the press said. Did this mean then that the ECB was ready to accept other sovereign debt (read Portugal and Spain) as collateral? No, said Trichet, this was a special case.

What the decision does is to bail out EU banks with masses of potentially toxic Greek debt on their books by converting that cash into cheap ECB money, which will make those EU banks look a great deal healthier. How, the press wanted to know, was the ECB able to feel so confident about Greek debt when the ratings agencies were trashing Greek debt? Was it planning to take over the job of the ratings agencies as far as sovereign debt was concerned?

You will notice that we are already in tricky waters here. However, Trichet is an extremely capable man. His answer was that the ECB was simply being consistent in the case of Greece and was not taking any position with respect to any other country, and specifically the ECB was not taking any position with respect to Portugal and Spain. “Portugal is not Greece,” Trichet said, and he added, “And Spain is not Greece either – this is plain if you look at the numbers and the numbers are very important here.”

How is the ECB “just being consistent” in taking only Greek bonds? Simple. The ECB Governing Council unanimously approved the Greek bailout plan. It unanimously approved the bailout, and unanimously judged that the Greek bailout solves the problem if the action plan is seriously implemented, which it unanimously expects Greece to do. This being the case, where’s the problem with Greek debt? It is only consistent for the ECB to accept it as collateral from EU banks. If this makes you boggle a bit, you are in good company, but Trichet carried it off splendidly.

Then the press returned again to the topic of the ratings agencies, and this time Trichet spoke more plainly. A reporter again asked: “If the ratings agencies are procyclical (exacerbating each cycle by emphasizing an upward or a downward trend) are you going to downgrade the ratings agencies or even take over their function? Are you going to be the judge on (the status of) sovereign debt?” To which Trichet replied:

“We currently have a very deep analysis (of the role and function of ratings agencies) being pursued at a global level. The issue of whether or not there are procyclical factors that are adverse in the behaviour of ratings agencies is part of the discussion in the G20 and at the level of the Financial Stability Board, and it is work in progress. The problem is not particularly (one for) the ECB. It is a global issue and it needs a global response. This is one of the areas where we can see that there is an element of procyclicality (his term) that has to be fully elucidated. We are working to see what the best possible avenues could be, and I do not want to prejudge that.”

If I was on the board of Standard and Poor’s, or Moody’s or Fitch, I’d be worried. The issue though, of course, is whether we would be better off if some agency which the politicians could influence, was to be parachuted in over the heads of the ratings agencies. Somehow I doubt that. All those good words about the solidity of the current Greek bailout are very carefully couched for the near term and look a bit weird when juxtaposed to the rioting in the streets in Athens. No one in an official position is looking where the markets want them to look, i.e. three to five years out. So where does that leave Greek ten year notes? You guessed it, swinging in the breeze…

Further reading on EU bailout and sovereign debt

Tags: credit rating agencies , ECB , Greece , IMF , Jean-Claude Trichet , regulation , sovereign debt
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