Today, Greece and Portugal saw their credit ratings downgraded, once again. Greece’s socio-economic mess notwithstanding, reading the linked BBC article made the absurdity of the dependence on the ‘markets’ (and the ‘unrated’ rating agencies that drive them) clearer than ever: in 2010 Greece woke up to the realisation — or at least some in that country did; others had realised much earlier and a portion of the population was in denial — that it was in dire straits. It became clear that a massive existing debt, years of mismanagement, corruption, collective contempt for law, binging on a false sense of wealth, frivolous consumption and a norm promoting a degenerate unproductive lifestyle meant that the country could never meet even its most fundamental obligations alone, so it turned to the support of the European states in an attempt to secure funds with reasonable terms and — in the process — convince and calm the markets, so that it could lower the interest rate of its bonds that had skyrocketed in the period of a few months. At least that was the official explanation. This mechanism came, first in an ad-hoc form, and now in the form of the ESM. Let’s be clear about something: the ESM is meant to be a stabilisation mechanism that ensures that states in the eurozone will be able to secure funds with relatively reasonable terms; terms better than those offered by the markets, but not exactly a free ride. The ESM is not panacea; it is primarily meant to benefit those commercial entities that have invested in states that make use of it, even if there is a possibility of partial or full restructuring of the debt —a measure which would lead to losses for the lenders of those states. Since the ‘crisis’ erupted Greece’s credit rating was downgraded several times. The latest downgrade, it was argued, was reflecting the fact that the ESM might facilitate a restructuring of the debt, leading to a loss for the lenders, thus making any investment in Greece riskier. This makes little sense: the main reason the ESM was created was to help EU states requiring assistance to secure funds with reasonable terms and avoid default — thus satisfying the markets concerned that those states might not be a good investment for them and in the process lowering interest rates. Yet, the very existence of the ESM was now being used as a reason for a further downgrade, under the pretext that since under the ESM it is possible for a state to restructure its debt under certain circumstances, any investment in this state’s bonds is less attractive.
The problem with S&P’s downgrade is not the rating per se (I am not qualified to have an opinion on what Greece’s rating should be), but the justification for it is mindbogglingly bad. A state always has the possibility of defaulting or restructuring its debt and is ready to face the consequences of any such action, if it does. The fact that the ESM makes restructuring easier for states is not hurting investment. It does not ‘legitimise’ restructuring. On the contrary: it ensures that states making use of the ESM will not be forced to default and will have reasonable terms of repayment, which should mean that they will, sooner rather than later, manage to get their economies back on track. After all, it is in the interest of the EU to ensure that necessary reforms accompany the use of the ESM. The arguments of S&P are as laughable as the trustworthiness of ‘unrated’ agencies like it: clearly the successful existence of the ESM undermines S&P’s ratings, in as much as it undermines the power of the market to command high interest rates, at least in the short term.
There is little doubt that Greece, Portugal, Ireland and a number of other EU countries are in dire need of significant reforms. Yet, things are rarely monolithic, in the way a credit rating is: There are few reasons, for example, for countries like the UK to have a triple-A rating, given their amount of debt, the state of their economy or its outlook. If the credit rating agencies were doing their job properly, as opposed to supporting the interests of a handful of investment funds by exploiting their historic influence on the market, the ratings would be very different for a whole slew of countries that now enjoy extremely high ratings (and perhaps a few others that are consistently rated low). It is clear that the reasons many of the economic powerhouses of Europe — and many others — are not targeted by the rating agencies yet, are not purely economic. Cornering the PIIGS — and by extension the rest of the Eurozone countries — by constantly lowering their credit rating and, in effect, excluding them from the markets, does the world a disservice: It increases the possibility of social instability, it eliminates any possibility for sustainable development and it weakens the foundations of the global economy, not least because it sets a precedent whereby abstract ratings by unrated private entities are allowed (and enabled) to affect the fate of millions of people. If it were completely up to them, a number of EU states would have already defaulted, with massive costs to both investors, a very large population within those states and ripples that might affect economies well beyond the borders of those countries. That, the fact that those organisations are completely unregulated, have to provide extremely little justification for their ratings, are not evaluated by anyone, in any way and the fact that they wield immense power over institutional investors that depend on them, raises concerns as to their role in the global economy, their impartiality and the effect they’ve got on millions of people.