Vincent Fernando
The Business Insider
March 4, 2010

Is your nation under massive financial pressure due to deteriorating sovereign debt ratings?

Rising interest costs got you down?

Rather than having to actually tackle your mounting debt problems, here’s an innovative solution from some Eurozone finance ministers — create your own, friendlier credit ratings:

Der Spiegel:

Now European Union governments are planning to take measures to break the dominance of the main rating agencies, according to a report in the Wednesday edition of the German business daily Handelsblatt. The newspaper reports that euro-zone finance ministers are pushing the European Central Bank (ECB) to set up its own sovereign rating scheme for the 16 members of the euro zone so that it no longer has to rely on private rating agencies, such as Moody’s.

Neither the ECB nor the rating agencies were prepared to comment on the alleged plan when approached by Handelsblatt.

The sad thing is that even Der Spiegel gets the situation completely backwards:

Rating agencies have massive power over the fate of companies. A change from an “investment grade” to a “junk” rating can cost a firm billions or even cause it to go bankrupt. The big three — Moody’s, Standard & Poor’s and Fitch — can even decide the fate of entire countries. All that is currently preventing a massive liquidity crisis for Greece is the fact that it still has an A2 sovereign credit rating from Moody’s. But with the agency already threatening another downgrade, such a crisis may not be far off.

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To think that a negative rating is what decides the fate of a country is to believe that a doctor who tells you that you have cancer is a murderer. Debt levels are deciding the fate of European countries right now, while ratings agencies are just the messengers reporting what they see. Let’s not forget that ratings agencies were blamed for being too lenient during the financial crisis. Thus they are now far more careful to make sure they err on the side of caution.

If a company like Moody’s were to suddenly turn a blind eye to the debt problems of Greece, for example, and be ‘nice’ by giving a favorable credit rating, their friendly rating wouldn’t have any market credibility if the facts were obviously much different.

Which means that if a new ECB ratings agency only delivered friendly ratings it would also have zero credibility and its ratings would be ignored. Thus to suggest an ECB ratings system as a solution to the Eurozone’s debt problems exposes how financially ignorant some of these leaders are. The problem is the debt, tackle it, there’s no easy way around it.

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