The main rationale behind S&P’s downgrade of nine EMU countries on Friday 13 January was the inadequacy of the political initiatives undertaken so far to address the ongoing systemic stress in the eurozone. However, this reasoning is not convincing, as the downgrades among the EMU countries are highly selective. The second largest economy in the eurozone, whose rating is of considerable importance for the rescue fund EFSF, was downgraded from AAA to AA+, whereas other countries in dire budgetary straits, such as Belgium, were spared a downgrade. Even more blatant is the discrepancy between France’s new rating and the upheld triple-A status for the UK. The debt picture and the economic situation in France are by no means as critical as in the UK.
The two-notch downgrade of Italy and Spain is difficult to comprehend. Italy in particular has recently undertaken radical steps to consolidate and modernize its economy and is aiming to achieve a balanced budget next year. Although S&P acknowledges this, it offsets it with the risk of a sudden deterioration in market conditions. Only last week, both Italy and Spain managed to conduct major bond issues smoothly and thus help assuage the markets. But now the downgrades rekindle the risk of an increase in spreads.
Changes in the global financial architecture have significantly boosted the importance of the rating agencies in recent years. The ratings are indeed important as a gauge of a country’s long-term credit standing. However, the rating agencies have recently tended to base their assessments heavily on shorter-term factors such as a country’s economic outlook or the respective risk spreads on the capital market. It would certainly be desirable if the focus were to be more on the fundamental economic assessment of a country. The establishment of a European rating agency could contribute to methodological diversity. In their current form the rating decisions fail to provide any genuinely new insights as the financial markets can anyway get a picture of a country’s current economic situation based on all the information available. It is therefore to be hoped that the latest downgrades will not have any grave repercussions on the markets and the refinancing terms for the countries affected.