Image via WikipediaThe credit rating agencies are threatening country after country with "rating downgrade". Many erstwhile respectable countries find themselves degraded to "junk" status - yet these are countries with a long History and hard-working citizens, like Portugal and Greece (yes, there are honest citizens there too, even if the Germans don't believe it!).
It's like going to school: if you're a "well-behaved" government keeping your debt under control, then you earn an A, even a triple A, like the United States.
If you're "badly-behaved" and can't keep your debt from blowing out of control, then you get a "B", and fewer investors will buy your bonds (some funds have strict rules about buying only A rated bonds). If you still won't toe the line, then you get a "C" and no investors will buy your bonds the next time you go to market to refill your coffers.
In a nutshell, that's how credit rating agencies call the shots on the international scene, and get sovereign governments cowering and scampering for cover. Italy is the latest country that has come under fire, causing Tremonti, Italy's finance minister to work on the double to put into place a "maneuver" - "manovra" in Italian, meaning more taxes and less benefits. In other words: a quick dose of austerity. And it could spell out BIG trouble for the Eurozone as it is not remotely ready to protect a country as big as Italy: the rescue fund currently in place is simply not enough. Click here for more info on this.
And if the United States Congress doesn't lift the "debt ceiling" by next August 2nd (i.e. allow the government's debt to rise above the pre-set limit), the United States itself could see it's status downgraded... Perhaps not to the level of "junk" - but a downgrade would have a terrifying effect worldwide, much worse than Greece, Portugal and Italy combined, considering the size of the American debt.
But of course such a scenario is unthinkable. There are only three major credit agencies that call the shots; several countries have their own, including the Chinese, but they have no effect worldwide. And, no doubt a curious by-product of American capitalism, it so happens that all three agencies are American: Fitch, Standard & Poor's and Moody's. Don't be fooled by any of them having dual headquarters in Europe. They are all American and use American-trained economists as their analytical staff.
So, right or wrong, the US has felt pretty safe so far (yes, so far...but who knows).
Europeans are not so happy. European politicians have repeatedly gotten annoyed at the Three Big agencies, and called for the creation of a European credit agency, and barring that, more stringent rating agency regulations. The latest to call for a new European agency has been the German Foreign Affairs Minister - which is interesting, considering how the Germans have so far handled the Greek debt crisis and how they still resist setting up either an effective rescue fund or common defense mechanisms. Like, for example, floating Eurobonds that would be guaranteed by all Eurozone members, Germany included (natch, and that's the rub as far as the Germans are concerned: they've been the winners with the Euro but they don't want to pay to defend it).
There is little doubt that the Euro's very existence is threatened by the barrage of downgrading coming out of the Three Big. And the Euro is an easy prey for attack: economists have always held that no currency is viable if it isn't backed by a sovereign political entity capable of conducting (1) a monetary policies and (2) fiscal/social security policies. That's the key to a viable, world currency.
The Euro just isn't there. The European Central Bank only covers monetary policies. And it's made very clear that it will follow the ratings set by the Big Three: for example, in the case of Greece, the Big Three have indicated that getting private bondholders of Greek debt to agree to a roll over or delay in payment was akin to "selective default" - and in that case, the European Central Bank would stop financing Greek banks.
All the rest of the policies that affect a currency - from tax to pensions - is still in the hands of the 17 Eurozone member governments. Judging from the lack of leadership displayed by European politicians, it is likely to remain that way for a very long time.
That means the Euro can crash with a very little nudge - all it would take is for Spain or Italy to threaten to go under (no need to actually go under - just the threat will do).
The little nudge comes from the Three Big, of course, who gleefully note that austerity is needed to control the deficit but it slows growth - making therefore a country unable to ever pay back its debt.Meaning what? Default on te horizon!
So you're damned if you do, and damned if you don't.
What kind of economists do the Three Big Agencies employ? What is their agenda? To destroy sovereign debt because their agency clients have placed bets on that particular outcome?
Do you think I'm exaggerating? Perhaps there's not an actual plot, perhaps it's just an unfortunate set of circumstances. But it's a fact that the Three Big in question are NOT independent: they are paid for by their clients. Who are their clients? Big corporations wanting to raise money on the stock market, financial power houses like Goldman Sachs. In short, the big guys with big money, that's who. And they need the Big Three for their financial maneuvers: without a rating, you can't float anything on the market, can't get an IPO going, can't do your financial cooking.
The Euro was an obvious target, as it hobbled along on one leg only (the monetary one). And an obvious, easy way to make money: bet on its demise and get the credit rating agencies to say so. Nobody can be accused of collusion, because it makes economic sense: austerity cures deficits, austerity causes recessions, so a default is inescapable, sooner or later. Plus alert the media, that acts as an echo, amplifying the Big Three's ratings that otherwise wouldn't be heard.
And voilà! You have the Irish crisis, the Greek crisis, the Portuguese crisis, and probably the Italian crisis next.
Will the world economy really collapse because of this incredibly selfish and dangerous betting game?
Perhaps not. The politicians and the taxpayers (always us!) will come to the rescue. That's what's expected, right? And it will be done at the last moment - after summer (the Germans have asked to delay decisions on the Greek bailout until September). I guess our politicians don't want to have their holiday spoiled.
How do you feel about this state of affairs?
I'm disgusted. European politicians are a revolting lot, all they think of is their next election and Europe be damned!
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