S&P's euro downgrade threat: standard practice, poor timing

Dec 8, 2011

There may be politics at play in the timing, but US ratings agency is right to warn investors about Europe

ANGELA MERKEL and Nicolas Sarkozy appeared to shrug off Monday's threat by the US ratings agency Standard and Poor's to downgrade the credit ratings of Germany, France and four other AAA countries in the eurozone. But as a second warning emerged from S&P yesterday – that they might have to downgrade Europe as a whole – some are questioning whether politics, rather than economics, is behind their doom-laden pronouncements.

Not the first time
Standard and Poor's is "injecting itself into the political process", say John Detrixhe and Zeke Fauxon on Bloomberg.com. It's not the first time. It's the reason they were "rebuked" by Warren Buffett after downgrading the US over government gridlock in August.
Now S&P has not only ratcheted up the stakes of the EU summit – but also hobbled it, blogs Clarissa Tan on The Spectator. "A downgrade watch, though not as bad as an actual downgrade, causes tremendous unease among banks and investors."
Merkel and Sarkozy will have this hanging over their heads, adds Tan. It's a threat to downgrade their debt not only if they don't produce a resolution to the euro crisis, "but if they don't provide one that meets S&P's approval".

Who are S&P, anyway?
Who the hell are Standard and Poor anyway, asks Alastair Campbell on his blog. I am being very sceptical, says the former Labour spindoctor, but "how can it be guaranteed that there are no vested interests at play in their ever more regular pronunciations on the eurozone?"
Left-wing blogger David Osler goes further. "What we are now seeing is a further illustration that much power under capitalism rests not with elected politicians, but private sector interests promoting their own agenda... S&P is effectively pushing its own brand of neoliberalism."

Actually, S&P were right
"Aside from being tactless, I cannot see what S&P has done wrong," John Gapper writes in The Financial Times. The failure of agencies in the 2008 crisis was to give a false seal of approval to subprime securities and then downgrade them in a rush. Having complained so loudly that agencies betrayed the interests of the investors by being over-kind in the past, "it is hypoctrical for governments to demand soft treatment" now.

Süddeutsche Zeitung suggests that S&P "is making itself easy prey for critics... Why did the warning come so shortly before the summit? Why is the accompanying report so full of policy recommendations?"

But the German daily feels bound to conclude: "That said, the substance of what S&P is saying is quite right."

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