The super state of the European Union is reacting to information potentially undermining their political agenda in the expected way: prohibition, repression, and censorship. The latest move to “save” the economy is not to get the finances under order, as any individual or market organization would have (been forced) to. No, to government the solution is to sweep the problems under the carpet – to pretend they aren’t there. And, of course, to shoot the messenger. Long before he arrives with the bad news.
This is what the European Commission is now doing. While President Obama badmouthed the rating agencies, at least he did not (as far as we know) outlaw rating. But this is exactly where the European Commission is heading: the best way of stopping a market reaction to bad finances is not to avoid bad finances – it is to hide information of the fact. In other words, they propose a “blackout” of credit ratings of troubled European states. It is the typical knee-jerk reaction only governments (believe they) can get away with.
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The only reason to have these agencies in the first place is to give bond investors cover for underwriting loans to bankrupt governments. Besides they are quasi government anyway. And more over no good investor would use their ratings for anything but lawsuit cover.
This may be true, Bogart, but what is interesting here is not whether the credit-rating institutes are legit – but how government treats them as soon as they do not do exactly what government wants. It is very expected, but still worth pointing out.
If you want to see what the market thinks of the credit worthiness of Sovereign debt, check here:
http://www.cnbc.com/id/38451750
The rating agencies have have a poor track record. They rated all those MBS AAA, downgraded the US when it has almost zero probability of defaulting and mistakenly downgraded France. These guys have enormous market influence and they always seem to get it wrong.
Almost zero.
I lolled hard:
http://spectrum.ieee.org/riskfactor/telecom/internet/sps-technical-error-outrages-french-government
At 1557 Paris time yesterday, the rating company Standards & Poor’s sent out an erroneous alert message to a number of its subscribers of its global credit rating web site that the company had downgraded France’s triple-A credit rating. According to the Wall Street Journal, it took nearly two hours before S&P sent out another note stating that the alert was in fact a “technical error.”
The French government, which has been trying hard to maintain the country’s triple-A credit rating amid the financial turmoil rocking the European Union, was understandably upset about the “shocking error” and S&P’s non-explanation for it. According to a Bloomberg Business Week story today, the EU’s market regulator is going to open up an investigation.
Market traders also were not happy about the incident, either. According to one London trader quoted in this story in the Financial Times of London:
“We are furious with S&P. To make such a mistake in this febrile market with worries over France’s triple A is highly irresponsible and alarming.”
The S&P, which has few friends in the EU (or the US for that matter), better have a very credible explanation very soon for how and why the “technical error” occurred and why it took so long to correct it.
The real question is why does S&P rate France AAA and the US AAA- when the credit default swap market is charging 2.25% to insure a French 5 year bond and only 0.5% to insure a US 5 year bond (note)?
In the US Corporate Bond sector a 2.25% spread from AAA would imply a BB rating.
The French don’t have a central bank at their complete disposal, that’s why.
http://www.safehaven.com/article/23301/why-the-sovereign-debt-crisis-began-in-europe
The comet speeds towards Springfield, through the polluted atmosphere. Chunks of it start to fly off. “Look!” cries Marge, “It’s breaking up!” yells Lisa. The rapidly diminishing-in-size comet punctures the Skinner weather balloon, then places a direct hit on Ned’s bomb shelter — destroying it in a pile of masonry.
Bart: Cool. [picks up what's left of the comet]
Lisa: We’re saved!
Everyone: Yay!
Selma: Sure makes you appreciate the preciousness of life.
[she and Patty light a cigarette and puff contentedly]
Moe: Let’s go burn down the observatory so this will never happen again.
http://www.snpp.com/episodes/2F11.html
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