Moody standards

How influential are ratings agencies and their downgrades?

The weekly circus of ‘will they, won’t they’ always seems to end in ‘yes, they will’ as another country suffers another rating downgrade somewhere in the world. The three major agencies, Moody’s and Standard and Poor’s of the US and the majority-French Fitch, take it in turns to lower debt and credit in a not-so-merry-go-round of economic crises.

The three agencies named above control nearly all the market between them. They rate risk and assess the strength of structures and values of various institutions. They analyse any entity, from a local council in the UK to a multi-national bank. And, of course, governments.

Politicians in those governments get worked up by unhelpful negative rating and downgrading of countries’ rescue and bail-out plans. While Greece lies on a hospital bed and European doctors argue outside the room, the credit rating warnings and negative updates are like secret turns of the key in the lock, cutting Greece off even further from hopes of a recovery. But swifter action in the first place from the EU and more attentive ears to the words of the agencies could well have led to a more positive situation than the current atmosphere.

Some politicians, such as Italian PM Silvio Berlusconi, have reacted with shrugs and finger-pointing to downgrades. Certainly, after one of the big three lowers a rating there is at times a complacent attitude displayed when the other two come knocking later.

Prime ministers and bankers can work themselves into a fever trying to avoid the haunting removal of letters from a rating. The agencies hold immense power – the decision by Standard and Poor’s to take away the US’s AAA rating in August was seen as a major decision for consideration in the 2012 elections, despite the votes being 18 months away.

It has seemed in the past that patronising and slavish attitudes has been misplaced –  the agencies infamously failed to forecast the first tremors of the 2007-2008 credit crisis; indeed, those tremors were hidden below the masses of top ratings the agencies were mistakenly handing out.

They do perform good work and their advisory and analytical roles on government policies, particularly the eurozone’s measures, are seen as critically useful. But they are for-profit organisations and some economic commentators feel there is a conflict of interests in their actions. They can deal heavy blows to economies and send markets into frenzies with their decisions and so, at this crucial time – especially for the euro – there is a serious need for more calm negotiation with finance ministries (who themselves must stop fudging the issue and get on with sorting out Greece). Missing the first part of this credit crisis doesn’t mean the agencies have to make up for it by being overly critical now.

SPANISH ELECTION I – “En España no hay nada”

On 20 November Spain will hold a general election. This blog will cover it live from Madrid. Over the coming weeks in the build-up to the vote there will be preview posts on this mid-economic crisis European election

“En España no hay nada”

(There is nothing in Spain)

This concise and brutal opinion was how a friend described the employment situation in Spain to me in a trip to the Spanish capital last week. Madrid was buzzing as we sat in a cafe in a busy square between Chueca and Gran Via. It was the last weekend of summer and the warmth of the day carried on into the night. But the rays of sunshine are not lighting the mood among the youth when it comes to job opportunities.

The twenty-something went on to describe to me how, despite having plenty of experience and relevant qualifications in his field to his name, he still found himself banging his head against an immovable job door. There is no easy route to an exit from this crisis.

This weekend, the credit ratings agency Fitch downgraded Spanish debt amid the ongoing lack of resolutions over the Mediterranean monetary maelstrom. The lack of an answer to the crisis is mirrored in Spain by the scarcity of employment opportunities. The indignados movement has exemplified the frustration of many Spaniards and their demonstrations will be discussed in the next special Spanish Election post.

Many of the españoles I met had decided to go back into education, after months of trying to use the first degree they completed to get a job. One educational option is to study a specialist subject to try to set yourself apart from the crowds. But Spain needs a boost to the economy, not class numbers. It is a not problem easily solved by more debt-building through enrolling in futher courses.

Spain’s powerhouse construction sector is faltering. The economy is critically injured. Back in the square with my friend, he paused and looked down at the table, pushed his glass to one side and reiterated firmly:

“I am going to apply to French companies now, and to London as well. En España no hay nada.”