Another attack from the rating agencies
19 October 2011
A few days ahead of the EU summit that should be “decisive” for the eurozone, rating agencies have degraded or threatened to degrade the sovereign rating of Spain and France and the Italian banks. A final assault while Brussels is trying to get its act together? asks the European press.
“Moody's places France on probation,” leads La Tribune on its front page following the decision on Monday October 16 by the U. S. rating agency to monitor the situation for another three months to see if the “stable” outlook for the country’s AAA rating remains justified. Of the six countries in the euro area getting the highest rating, France is the one with the worst finances, the agency said in a statement. This announcement, writes La Tribune, coming as it does “within days of a crucial summit on the future of the eurozone, reinforces the drama.” For if France were to lose its AAA rating -
... it would be a nightmare scenario for the European Financial Stability Fund (EFSF) [...] which is based largely on the financial strength of Germany and France. [...] Paris in effect guarantees over 20 percent of the amount that the Fund may borrow to help the countries in trouble in the eurozone.
For Mediapart, the warning from Moody's is tantamount to blackmail, reminding as it does French politicians, who are preparing for the presidential election of 2012, that “there is no question of letting up the pressure – of, among things, paradoxical injunctions calling for both austerity and growth – placed on them by the financiers.
This blackmailing of France by the financial world is a dangerous game”, the information portal maintains:
In warning France publicly, Moody's is laying the groundwork for an unleashing of speculation. The self-fulfilling prophecies of the financiers could once again come true, dragging France down in turn into an uncontrolled spiral.
If it’s threatening France, Moody's is beating up on Spain: “The trio is made complete,” notes El País following the two-grade deterioration in the Spanish debt rating (from AA2 to A1) by the rating agency, trailing in the footsteps of its fellow agencies Fitch and Standard & Poor's. “But the worst may be yet to come,” continued the Spanish daily, “since Moody's, like other [agencies], is maintaining a negative outlook and leaving the door open for further downgrades.” Moody's believes that Spain is still too vulnerable to the sovereign debt crisis in the eurozone, for which it sees no “credible solution”. The impact of the downgrading on the ability of Spain to obtain financing in the markets will depend, however, on the outcome of the EU summit on October 23...
... from which may come an agreement that the [EU] bailout funds can partially stand security for Spanish and Italian debt.
In Italy, where it’s the banks that are in the sights of the rating agencies this time, one month after downgrading treasury bond ratings Standard & Poor’s have dealt another blow to the Italian credit system by cutting the ranking of 24 banks, writes La Repubblica. In its statement the U. S. agency urges the government to carry out the structural reforms needed to boost growth if it is to prevent the rating from sliding further. On the same day, Fitch downgraded the rating of FIAT (whose sales are faltering) due to the precarious financial situation of its U. S. partner Chrysler, La Repubblica adds.
Faced with the onslaught of the markets against states, which are looking more and more vulnerable, something is beginning to shift in Brussels. To counter the dreaded speculation against the public debts, the European Parliament decided on the evening of October 18 to prohibit the naked short-selling of sovereign credit default swaps (CDS) – used to hedge against payment defaults of a state asset that the seller does not actually possess – reports Jean Quatremer on his blog. For the Libération correspondent in Brussels -
... the markets, by attacking the states, have gone too far. The EU has decided to begin to pull out its claws. The European Parliament has, in fact, rallied the states to its proposal to ban one of the favourite instruments of speculators, which was used notably to destabilise Greece in the first quarter of 2010. The agreement was anything but obvious, given that the states are particularly sensitive to the pressures from their financial sector, which loves these instruments. The deepening crisis affecting the eurozone that is now hitting the banks, however, has clearly convinced the European capitals that it was time to crack down.