Monday, 13 February 2012

Moody's revises UK and French ratings to "Negative Outlook"

UK sovereign bonds have today been given a "negative outlook" by rating agency Moody's, along with those of France and Austria. All three countries are still rated AAA by Moody's, even though France had lost the triple A rating assigned by Standard & Poor's in January 2012.

Spain was downgraded to A3 from A1 with a negative outlook, Italy was downgraded to A3 from A2 with a negative outlook and Portugal was downgraded to Ba3 from Ba2 with a negative outlook, according to Moody's criteria. The agnecy also cut Slovakia’s, Slovenia’s and Malta’s ratings.

It should be noted that "negative outlook" is not quite as drastic as "negative watch", implying only a one in three chance of losing the top rating over the next 12 to 18 months.

Sunday, 5 February 2012

Taking a Stand - Nation States Reclaiming Sovereignty, or Political Posturing?

Arguments that sovereignty has shifted from the nation state (in its post-Westphalian glory) to "the markets" are not new. The sovereignty of the markets and their ability to shape government policy and borrowing are well documented. What is less frequently noted is the role played by the "gatekeepers", or "gateopeners" to the markets. This is a term popularized by Professor John C. Coffee to describe those actors who regulate entry to - and exit from - the market. Credit rating agencies are prime examples of gatekeepers. While most issues and financial products require at least two ratings, government oversight of the markets in the form of ratings-based regulation further entrenched, and legitimised the role of the CRAs. As such, it is not a great stretch to argue that sovereignty has shifted from the nation state (perhaps via the markets) into the hands of gatekeepers to the markets. This has been the de facto situation for several years, and went largely unnoticed - or at least largely unchallenged.

It is also easy to argue that the sovereign debt rating is not simply a requirement for market access, but a political statement and quantifier of the strength and direction of government of a particular state. Yet recent comments by the French finance minister, Francois Barron, regarding the 'political' intentions of threatened downgrades question whether politics may be attempting to re-appropriate the discourse which has become the preserve of markets over the past decades. In December 2011, while France was threatened with the loss of its AAA rating, he stated on the French radio station Europe 1 that the French economy was in a better shape than the UK's. He was speaking after the French Prime Minister Francois Fillon and the French Central Bank Chief Christian Noyer both pointed to comparative weakness in the UK economy and outlook. Mr. Noyer went on to say that the U.K. should be downgraded before France.

In an interview with the French paper Le Telegramme, Mr. Noyer stated "A downgrade doesn't seem justified to me when you look at the economic fundamentals." He went on to say "Or else a downgrade should come first for the UK, which has a greater deficit, as much debt, more inflation, and less growth than us, and collapsing credit." He finished by stating that "Our British friends have a higher deficit and more debt, and I would say that the ratings agencies have not yet noted that."

These claims have been echoed by a senior lawmaker in Angela Merkel's party. Michael Fuchs, a CDU lawmaker and deputy parliamentary floor leader, is quoted as saying "It isn't fair that Standard & Poor's concerns itself for example with France and Austria, but why don't they do it with England." He went on to state that "It's simply not fair to leave England its AAA rating with a stable [outlook], while other countries get a downgrade, this is not right."

In other interesting developments, Italian prosecutors have announced that they are investigating Standard & Poor's recent downgrade of Italy, in particular whether crimes of market manipulation and illicit use of privileged information were committed when S&P's reports were released in May, June and July 2011, prompting a sell-off of Italian assets. The probe has been extended to include the January downgrade, however Standard & Poor's rigorously denies the claims.

As noted in a previous post, the UK is at much less risk of default than the Eurozone states for the simple reason that the Bank of England has signaled its willingness to print more money. However the interesting point here is whether these statements reflect a willingness on the part of governments to engage with credit rating agencies on a political and to reclaim the political debate. In other words, are governments now willing to play the agencies at their own game?

Sovereign rating methodologies - now publicized on Standard and Poor's and Moody's websites in a transparency drive - has always comprised an element of political assessment. The downgrades of Italy that eventually prompted Berlusconi's political demise were perhaps the most overt in their political reflections, however the assessment is present in any sovereign bond rating. What Eurozone leaders don't seem to realize is the effect their lack of political will is directly impacting on their ratings. Were Chancellor Merkel to seize the proverbial bull by the horns, arguably we would not be seeing the rounds of ratings downgrades that we are. European integration in the 1970s and 1908s stalled, and was referred to as a period of "eurosclerosis". Europe is once again seized with indecision, and is paying the price.

14th January - 'Au revoir' AAA

On the 14th January, France finally - and officially - lost its AAA credit rating. Had Sarkozy not made such a fuss about the importance of retaining it last year, it might not have been such a big deal. As it is, reports speak of Eurozone doom and little else. In total, nine countries in the Eurozone were downgraded; Italy, Spain, Cyprus and Portugal were cut two notches, with the latter two given "junk" ratings. Austria, Slovakia, Slovenia and Malta were the other countries downgraded. Germany kept its AAA rating.

But what do the downgrades mean? The sovereign debt rating is an instrument designed to gauge the likelihood of a state being able to repay its debts. There are several considerations that come into play here, discussed in another post. But here's where France and the UK differ - if the UK runs into problems repaying debts, the Bank of England can print more money and off we all go. The government has shown that it is not afraid to turn to quantitative easing, and this is an important reason why the UK - even with current debt levels - is much less likely to default that France, regardless of the devaluation that occurs. Germany has repeatedly blocked moves to allow the European Central Bank to print Euros, so France only has a finite supply. Considering Germany's experience with hyper-inflation in the 1920s, this is understandable, but leaves the Eurozone in a difficult situation.

Moreover, considering France was one of the main backers of the EFSF, the loss of a French AAA rating clearly had implications for the future of the fund. Two days later Standard & Poor's downgraded the EFSF from AAA to AA+. The loss of AAA ratings effectively reduced the fund's AAA rated guarantees from €440 billion to €260 billion. Approximately €40 billion of this will go to bailing out the Irish Republic and Greece, while €100 billion had been ear-marked for a second Greek bailout. Due mainly to procrastination and posturing on the part of Eurozone leaders, this latter has now risen to an expected €145 billion, however Greece is currently under huge pressure to implement further austerity reforms before this second bailout will be agreed.