The Daily Beast
January 11, 2011
By Zachary Karabell
In early December, the ratings agency Standard & Poor’s placed all 15 Eurozone countries under what it calls “negative credit watch.” Typically, that means there is an even possibility that it will downgrade the credit of these countries within 90 days. Nearly half that time has elapsed, which means that there is a considerable chance that within days, S&P will do for Europe what it did for the United States last summer and cut ratings.
The other two main agencies haven’t been silent. Fitch yesterday issued a statement saying that Italy was at risk, and that the European Central Bank had to take a more active role to prevent Europe from spiraling back into crisis and imperiling the global financial system. Both Fitch and Moody’s have indicated that there soon may be a downgrade of France, which has until now been a bulwark sustaining whatever remnants of a system still exist in the Eurozone.
It’s possible that the swirl of rumors and expectations of imminent downgrades will not materialize. Others believe that the sharp spike in interest rates of Italy in the fall, along with banks hoarding cash everywhere in Europe and indeed around the world means that markets have already anticipated downgrades and that when they come, it won’t much matter. That would be nice. It’s also quite possible that a series of downgrades will send already shaky global financial markets over the edge, setting off a chain reaction of mistrust and flight away from European debt and toward U.S. Treasuries that will send Europe decisively toward depression, the United States into recession, and the rest of the world into fear.
There is only one rational solution to the looming threat posed by the ratings agencies: they should stop rating sovereign debt. Cease and desist. A self-imposed restraining order. Why do they even rate government debt at all? The finances of governments are hardly secret. Anyone with a mind, an interest, or a need can do their own due diligence and analysis about whether the finances of Greece, Italy, the United States, Brazil, India, France, or any other of the nearly 200 nations in the world are too risky or safe or somewhere in between. There is no reason to pawn off that task to a few employees of three private companies, and doing so creates a ticking-time-bomb risk if those agencies act too quickly, allow their own biases to color the analysis, or act too late.