PARIS - Financial markets that waited a month for eurozone sovereign debt downgrades quickly ignored the news from Standard & Poor’s once it came, raising the question of just how pertinent international ratings agencies are.
On government bond markets, Spain and Italy found that the rates they had to offer to borrow money had stabilized and declined respectively, even though both suffered two-notch S&P downgrades.
In fact, all of the downgraded countries that sought to borrow money last week were able to do so at better rates than before the hatchet fell. “The markets donned their rose-coloured glasses,” remarked Fabrice Coustie, managing director of the online brokerage CMC Markets France.
“It was generally expected,” agreed Philippe Brossard, chief economist at at AG2R La Mondiale, in reference to the downgrades, and “it did not change anything fundamentally.” The S&P decision came “in a very troubled context in which everyone was already downgraded in fact,” Coustie said.
The event was also sandwiched between an exceptional European Central Bank loan of funds for three years, which occurred in late December, and an announcement by the International Monetary Fund last week that it would raise an additional 500 billion dollars to ensure the eurozone debt crisis did not scupper the global economy.
“The IMF is more credible than any European structure” created to provide financial support to sovereign states such as the temporary rescue fund EFSF or the future European Stability Mechanism (ESM), Coustie noted.
Context and anticipation thus appear to have weighed heavily in advance against the sovereigns, making it hard to say whether international ratings agencies have lost a lot of their influence. “They have relatively little impact on sovereign debt assessments because we have a pretty good idea of our own regarding the countries’ financial situation,” said Gunther Capelle-Blancard, deputy director of the Paris-based economic institute CEPII.
“We knew that Germany offers more guarantees than France, which in turn offers more than Italy,” Capelle-Blancard said.
Brossard noted that “the only country that really suffered (from the S&P downgrades) was Portugal, which fell below BBB-” or into speculative grade territory.
“That might spark an exit by some investors” who are obliged by internal regulations to hold investment-grade debt, he said.
Portugal nonetheless managed to place some shorter-term paper at better conditions than before its downgrade, but the rate on Lisbon’s 10-year debt climbed two percentage points from 12.5 percent to around 14.5 percent.
By comparison, the rate on reference German 10-year Bunds was just 1.782 percent last week.
Ratings agencies should not be “the sole reference, it is absolutely inappropriate to saddle us with this systemic risk” role said Carole Sirou, head of the French branch of Standard and Poor’s. Systemic risk is that which can do lasting damage to the financial sector as a whole.
It remains to be determined however the usefulness of ratings agencies that “pass their time running after the markets,” Brossard said.