BRUSSELS, Belgium – Europe’s top financial official has denounced them as tools of “American financial capitalism.” A senior German conservative says they are waging a “currency war” on the euro zone. Italy has sent in the cops against them, and a leading Portuguese newspaper resorted to English for its headline message to the ratings agencies: “You Bastards.”
Europe is in the grip of righteous indignation against the three US-based agencies whose warnings to investors about the risks of euro zone nations defaulting on their debt are widely blamed for exacerbating the continent’s economic crisis.
“They have declared a currency war on us,” stormed Elmar Brok, a German conservative who heads the European Parliament’s delegation for relations with the United States.
“Powerful forces in the USA, especially in the financial industry, are acting to enforce Anglo-Saxon interests against Europe,” Brok, a heavyweight member of Chancellor Angela Merkel’s party told the Die Welt newspaper.
The outrage has intensified since Standard & Poor’s, one of the three big agencies, downgraded its assessment of the creditworthiness of nine euro-zone nations on Jan. 13, wiping out the prestigious AAA rating of France and Austria.
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Three days later, S&P struck again, cutting the triple-A rating of the euro zone’s rescue fund, the 440 billion euro European Financial Stability Facility set up in May 2010 to provide emergency aid to nations unable to raise money on the markets.
The EU’s Economic Affairs commissioner Olli Rehn, a normally mild-mannered Finn known for choosing his words carefully, issued a statement calling S&P’s downgrade of the euro zone economies “inconsistent.” He was later widely quoted as telling a Finnish television channel that the ratings agencies are “not impartial research institutions” but “have their own interests” and work “very much in line with American financial capitalism.”
Behind the bluster, there is a widespread feeling in Europe that the ratings agencies have failed to take into account the latest moves to tackle the crisis. There is also concern over the power that the agencies wield over European economies, and frustration that governments are apparently powerless to control them. The three big ratings agencies — S&P, Moody’s and Fitch — control around 95 percent of the world market.
European officials point to the failings of the agencies during the subprime crisis of the late 2000s as proof that they are unreliable and overrated.
Back then, the agencies ignored the risks attached to mortgage-backed securities with catastrophic results, leading the US government’s own inquiry commission to conclude that “this crisis could not have happened without the rating agencies.”
Plans are underfoot within the EU to reduce the agencies’ influence. A series of bills currently being considered would oblige banks to carry out their own assessments of financial products, weakening their reliance on the agencies. Agencies would be forced to be more open about their methods of calculating ratings. European authorities are also encouraging the development of new agencies to break the influence of the big three.
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However Michel Barnier, the former French foreign minister who is spearheading EU efforts to regulate the sector, was forced to drop a proposal to ban the agencies from issuing ratings on countries in “exceptional circumstances” after objections from other members of the European Commission.
Italian authorities are taking more direct action. Financial investigators were reported to have raided S&P’s offices in Milan on Jan. 19, as part of a probe launched in May in the small southern city of Trani into complaints of market manipulation and illicit use of privileged information. The agency denies any wrongdoing.
Conversely, Italy’s Prime Minister Mario Monti was an almost-lone voice among European leaders declining to condemn the analysis that accompanied S&P’s downgrade of euro-zone nations, including Italy.
In an interview with the Financial Times last week, Monti agreed with the agency’s assessment that the downgrade was due to the weakness of the European response rather than the performance of the Italian government. The agency’s view appeared to strengthen Monti’s attempts to persuade German Chancellor Angela Merkel promote EU measures to boost economic growth alongside the fiscal belt-tightening.
Meanwhile, disgruntled Europeans can take some comfort from the fact that markets seemed to pay little attention to the downgrades, at least as far as France, Spain and Italy are concerned. All managed to sell bonds last week at better-than-expected rates.
Portugal however has not faired well. In the days following its downgrade to junk status by S&P, yields on its bonds soared to record levels despite praise for government plans to cut the deficit and reform labor markets.
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