The World from Berlin 'No One in Lisbon Anticipated This Stab in the Back'

European politicians are outraged by Moody's decision to downgrade ratings on Portuguese government securities to junk status. There are new demands for the influence of ratings giants to be limited. Editorialists at German newspapers on Wednesday aren't sure where to point the blame.
An uphill road in Lisbon: The decision by Moody's to downgrade Portugal's rating will further complicate the debt-strapped country's ability to raise fresh funds.

An uphill road in Lisbon: The decision by Moody's to downgrade Portugal's rating will further complicate the debt-strapped country's ability to raise fresh funds.

Foto: Jan Woitas/ dpa

Ask politicians across Europe who the bogeyman is this week and they will have no trouble telling you. Be it German Finance Minister Wolfgang Schäuble or European Commission President Jose Manuel Barroso, they'll mince no words about who the true villains in the euro crisis are: the ratings agencies.

Moody's surprise move to issue a junk bond rating  for Portuguese government securities on Tuesday has triggered the latest recriminations between European leaders and the world of high finance, once again prompting calls for a tightening of regulations on the agencies and a push for greater competition.

"This is an unfortunate episode and raises once more the issue of the appropriateness of behavior of credit agencies and their so-called clairvoyance," European Commissioner for Economic and Monetary Affairs Oli Rehn said at a press conference.

In Germany, Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel's conservatives said there was no basis for Portugal's downgrade, which came just two weeks after Portuguese Prime Minister Pedro Passos Coelho's new government came into power. "We need to limit the ratings agencies' influence," he said, adding that their "oligopoly" must be broken. Schäuble said the German government had been just as surprised by the action as other countries. Portugal, he said, is ahead of schedule in terms of implementing the austerity measures that had been demanded by the European Union and the International Monetary Fund in exchange for a bailout. Only one week ago, the government had even announced measures that, in parts, go beyond the agreements made in the aid package.

Commission President Barroso fired a further warning shot, reiterating that the European Commission, the European Union's executive branch, is currently developing further regulations for ratings agencies, with proposed new rules to be unveiled by the end of the year. One goal of the reforms is to introduce greater competition between ratings agencies, but Barroso did not mention considerations for creating a European ratings agency, saying only that: "It seems strange that there is not a single rating agency coming from Europe."

EU Countries Also to Blame

Of course, the ratings agencies are in no way solely to blame for the root causes of the current crisis. In addition to having accrued their public debt on their own, EU countries voluntarily use the data provided by the ratings agencies. In fact, some EU regulations stipulate particular ratings requirements from these agencies -- rules that have been agreed to by the member states, like the EU directives implementing the Basel II guidelines for bank capital requirements, for example, which have ratings benchmarks.

Torsten Hinrichs, head of the German branch of US ratings agency Standard & Poor's, defended his company against political criticism on Thursday, saying it was not the job of the ratings agencies to judge whether or not an approach to the debt problem was politically or economically the correct one. The job of the agencies, he said, is to assess a country's future solvency situation. Hinrichs added that the agencies had developed their methods through decades of work.

Yet it is still clear that the decisions by the ratings agencies can have the effect of being a fire accelerator in the euro crisis. On Wednesday, Moody's Portugal downgrade depressed share prices of major European banks and also drove down the value of the euro against the dollar. Shares in Portuguese banks, in particular, took a hit, with stock prices at Banco BPI, Millennium BCP and Banco Espirito Santo falling by as much as 5 to 7 percent.

"That is a harsh reminder that the problems are still there," one trader told a news agency. "Now Portugal threatens to be the next stone to turn. The people are nervous."

On Thursday, most German editorialists weigh in critically about the Moody's downgrade. One argues it provides further evidence that the German government may ultimately fail in its effort to seek voluntary participation by banks in the second Greek bailout planned for this autumn.

The business daily Handelsblatt writes:

"Moody's decision to downgrade Portugal's debt to junk status is entirely premature. Coming at the present moment, its most likely effect will be to add plenty of fuel to a smoldering fire. Of course, Portugal's Prime Minister Coelho has a Herculean task ahead of him. But he's only been in office for two weeks, and has until now showed himself to be willing and able to implement the measures tied to the country's €78 billion ($112 billion) bailout."

"The downgrade is likely to be a self-fulfilling prophecy. Moody's justified the lower rating by saying that Portugal will not be able to regain investors' confidence within two years. But with its downgrade, Moody's has made Portugal's fight to regain investor trust all the more difficult."

The center-right Frankfurter Allgemeine Zeitung writes:

"No one in Lisbon had anticipated this stab in the back. The announcement that Coelho's new conservative government was being sold down the river politically by Moody's only two weeks after taking office, was sinister news. In their ambitions to distance themselves from Greece in a positive way, had the Portuguese not done everything correctly? Their savings and reform programs were custom tailored to the demands of the troika (the European Union, International Monetary Fund and the European Central Bank) … And to quiet both the EU and the IMF, Coelho sought out Vitor Gaspar, a man with a reputation when it comes to stability-related policies that is practically German."

"The shock and anger is considerable. A former government minister even spoke of 'terrorism.' As stock prices fell and interest rates rose on Wednesday, at least some relief and encouragement came from German Finance Minister Schäuble. He said he doesn't share Moody's opinion and he threatened to limit the influence of the agencies, because by now people are not only shaking in Lisbon, but also in Madrid and Rome."

The Financial Times Deutschland writes:

"No question, the ratings agencies malfunctioned in the run-up to the financial crisis. They over-valued toxic assets and were complicit in the crisis. Now they seem to want to win back some credibility with more critical reports."

"But weren't the agencies rebuked for not predicting the downfall of Lehman Brothers, or for predicting it too late? Supposedly they were asleep at the wheel just recently, but now they've become too hasty. Something doesn't compute. But one point, at least, is uncontroversial: So far, every downgrade has proved justified."

"There's a lot of talk about conflict of interest among the ratings agencies because issuers of debt instruments are responsible for their own credit assessments. But no one talks about the conflict of interest at the institutions that Chancellor Merkel prefers: The EU and the IMF have hundreds of billions of euros in play in Greece alone, even if the loans are backed by state guarantees. Those are poor conditions for a disinterested judgement on the solvency of governments, or on the necessity of a debt restructuring."

The left-leaning Berliner Zeitung writes:

"It's becoming clear that the oft-promised participation  of the finance sector in bailout measures is a non-starter. This has been shown by the example of Greece. On the one hand the banks are supposed to give relief to Greece, but on the other, the banks themselves should not be put under strain, because then ratings agencies will officially declare a default ."

"The EU is working on pulling off this feat, but the result looks woeful so far. The participation of private investors in a debt rescheduling would hardly help Greece, only damages the banks a bit, probably won't prevent a default in the end and has now caused countries like Portugal to lose their creditworthiness. But there are a number of other ways of getting investors to pay: financial transaction taxes, wealth taxes or capital gains taxes -- all of this would bring in money without ratings agencies raising an objection."

-- SPIEGEL Staff, with wires
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