• Print
• E-Mail
• Feedback

03/03/2010

Rating agencies have massive power over the fate of companies. A change from an "investment grade" to a "junk" rating can cost a firm billions or even cause it to go bankrupt. The big three -- Moody's, Standard & Poor's and Fitch -- can even decide the fate of entire countries. All that is currently preventing a massive liquidity crisis for Greece is the fact that it still has an A2 sovereign credit rating from Moody's. But with the agency already threatening another downgrade, such a crisis may not be far off.

Now European Union governments are planning to take measures to break the dominance of the main rating agencies, according to a report in the Wednesday edition of the German business daily Handelsblatt. The newspaper reports that euro-zone finance ministers are pushing the European Central Bank (ECB) to set up its own sovereign rating scheme for the 16 members of the euro zone so that it no longer has to rely on private rating agencies, such as Moody's.

"The agencies got it totally wrong in the case of Lehman (Brothers)," one unnamed source close to European finance ministers told the newspaper, referring to the US investment bank that triggered a global financial crisis when it collapsed in 2008. "Who can say that they won't do it again?" Neither the ECB nor the rating agencies were prepared to comment on the alleged plan when approached by Handelsblatt.

The new approach is said to have broad support within the ECB. Sources in central banking circles told the newspaper that people within the Frankfurt-based institution are extremely concerned that Greece's fate is now in the hands of a single rating agency.

Under existing rules, the ECB can only accept euro-zone sovereign bonds as collateral when lending money if at least one of the three main rating agencies gives the country issuing the securities an A- rating or better. Moody's is now the only main rating agency that still gives Greece an A2 rating; Standard & Poor's and Fitch have already lowered their grades to the BBB level.

Although an exception to the rule is in place as a result of the financial crisis -- the current minimum rating is just BBB- -- that rule will expire at the end of 2010. If Moody's were to downgrade Greece, as it threatened to do last week, the country would be cut off from ECB loans as of Jan. 1, 2011, triggering a liquidity crisis for the country. This means that Moody's effectively has a veto over Greece's access to Europe's key financing facility.

"It is a very unfortunate situation that a single agency has got so much influence over whether the ECB accepts a security as collateral or not," Deutsche Bank chief economist Thomas Mayer told Handelsblatt.

Bizarre Situation

Goldman Sachs had already warned of the problem back in December. "This is a bizarre and ultimately untenable situation for the ECB," Erik Nielsen, Goldman's chief European economist in London, wrote in a note to clients. "The unthinkable -- that the ECB would not accept sovereign securities from a member as collateral -- has become a measurable risk, and one exclusively controlled by Moody's." If Greece's financial situation did not improve soon, he said, "the ECB would want to rectify the situation by revising its eligibility criteria for sovereign debt."

Experts told Handelsblatt that the ECB was perfectly capable of producing its own ratings owing to the quality of its research department. But it remains unclear when the new rating system might be set up. Given the crisis in Greece, the bank is likely to be cautious in acting, as any sudden change in the system could trigger doubts about the bank's independence.

To remain solvent, Greece needs to raise €20 billion ($27.11 billion) by the end of May and a total of €53 billion by the end of the year. But with its budget deficit at 12.7 percent of gross domestic product and €300 billion in sovereign debt, Greece may struggle to raise the necessary cash. The Financial Times Deutschland reported last week that many German banks are uninterested in procuring additional Greek bonds.

Greece had originally intended to begin an estimated €5 billion bond issue last week. But announcements by Standard & Poor's and Moody's that they may soon downgrade Greece -- in addition to turbulence on the financial markets -- led to a delay in the offering.