Monday, March 28, 2011

Sovereign debt: Hard to credit

by Richard Milne and David Oakley

Financial Times

March 27, 2011

George Papaconstantinou has a lot on his plate at the moment. In recent days, the Greek finance minister has launched a €50bn privatisation programme, brushed aside another setback in the battle against chronically weak tax collection and had to fight off investors’ perception of an impending debt default.

But this month he still found time to issue an extraordinary two-page diatribe againsts Moody’s, the US credit rating agency, for a decision to downgrade Greece to the same level as that of rivals Standard & Poor’s: B1 or B plus, a rating meaning “highly speculative” and well below investment grade. Athens called the move “unjustified” and “incomprehensible”.

The most vitriolic passage was left to the end: “Ultimately, Moody’s downgrading of Greece’s debt reveals more about the misaligned incentives and the lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy. Having completely missed the build-up of risk that led to the global financial crisis in 2008, the rating agencies are now competing with each other to be the first to identify risks that will lead to the next crisis.”

Europe’s sovereign debt crisis hit a new peak last week as Portugal slipped ever closer to becoming the next country after Greece and Ireland to need an international bail-out. For Jim Reid, credit strategist at Deutsche Bank, government debt across the developed world is “the last chain in the rolling supercycle of bubbles”.


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