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Home > Blogs > Anthony Harrington > Look how I changed the world, Ma… Ben Bernanke and Moody's on eurozone and US debt

Look how I changed the world, Ma… Ben Bernanke and Moody's on eurozone and US debt

Sovereign Debt | Look how I changed the world, Ma… Ben Bernanke and Moody's on eurozone and US debt Anthony Harrington

One of the oddest things about the latest market panic, which saw the price of gold rocket above $1590 for the first time and caused European markets to shed hundreds of hard-won points, is that the whole furore was sparked by probably no more than four or five people in just two organisations.

We are speaking here of a few top people at the ratings agency, Moody’s, and our old friend, the Chairman of the Federal Reserve, Ben Bernanke.

Moody’s started the ball rolling by first downgrading Portugal to near junk status, which left senior European politicians flabbergasted, then followed this up a week later with an equally swingeing downgrade of Irish debt, also to near junk status, which turned those same European politicians apoplectic. The downgrades put the European sovereign debt crisis back in the spotlight in a major way and redirected a whole bunch of investors away from risk assets and towards the safety offered by the heavenly metal.

Across the pond

Those who didn’t immediately flee for gold after Moody’s did its bit, got off their rear ends with alacrity when they heard Ben Bernanke testifying to Congress, in the Fed’s usual semi-annual testimony on the state of the US economy. Bernanke admitted that things were rocky and suggested that just maybe QEIII would be in order if a double dip recession looked like edging closer. QEIII equates to another, potentially yet more damaging weakening of the US dollar and a further exacerbation of tensions between the US and emerging markets in general – and, of course, China in particular. It would also further escalate US debt. Not the stuff to strengthen a feeble recovery, in the eyes of most investors. Hence the ringing of alarm bells and the scramble for gold.

Of course, things in the real world had not been going well before either Moody’s or Bernanke staged their separate interventions. May employment numbers in the US were poor and June’s gave cause for concern. The stress testing of European banks got off to a poor start with one of the major German banks withdrawing itself from the test, which spooked the markets a bit. China’s PMI numbers slipped, output slipped even more. The question of whether the markets were pausing or teetering was already gathering some momentum. Arguably, the Bernanke/Moody’s double act was just the catalyst for what was going to happen anyway. Events in the recovery phase after a deep recession move in fits and starts and there is little point, after the event, in spending much time analysing what the trigger points for the latest dip or upward dash actually were. However, it is disconcerting to find such a huge slippage in the global economy, prodded into motion by just three or four people. Had they stayed in bed or played golf instead of intervening, the price of gold might never have touched $1590 – or at least, not for some months yet. It puts one in mind of a devastating avalanche triggered by a single silly skier. The avalanche might have happened anyway, but then again, it might not have. We’ll never know.

Naughty corner

One thing that is certain, however, is that the ratings agencies are drinking in the Last Chance Saloon as far as many European politicians are concerned. The language that greeted Moody’s downgrades was distinctly purple in hue. The only reason no one mentioned a firing squad was that that option was not available. Instead, there were definite threats of seeking “civil remedies” for damage caused. Damage in the matter of sovereign debts worth billions? Now that’s a scary thought. What’s Moody’s worth, again?

And yet what is a ratings agency to do? When they shy away from telling the truth, as with sub prime backed assets, they get flayed. When they tell the truth, (and what is Irish and Portuguese debt if it’s not junk? I mean, would you buy some with your hard earned savings?) they get flayed. However, as one ex-ratings-agency person I spoke to recently observed, “that’s the nature of the ratings agency game, they’re well used to it and they just get on with things anyway.”

So who’s next in Moody’s gunsights? Italy? Spain? Or will they ponder Bernanke’s testimony and downgrade the US one day soon?

Further reading on globalization, US economy and the eurozone:

Tags: Ben Bernanke , China , Congress , credit rating agencies , dollar , downgrade , european debt crisis , eurozone , eurozone debt , eurozone debt crisis , Federal Reserve , global economy , gold , Ireland , Irish debt , Italy , junk status , Moody's , Portugal , qe3 , QEIII , risk assets , sovereign debt , Spain , US , US debt , US dollar
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