EU Slams Rating Agencies after Portugal Downgrade

By Gilbert Reilhac and | July 7, 2011

European politicians accused credit rating agencies on Wednesday of anti-European bias after Moody’s downgrade of Portugal’s debt to “junk” cast new doubt on EU efforts to rescue distressed euro zone states without debt restructuring.

European Commission President Jose Manuel Barroso said the decision to cut Lisbon’s rating by four notches so soon after it became the third country to receive an EU/IMF bailout was fuelling speculation in financial markets.

The cost of insuring all weaker euro zone states’ debt against default rose after Moody’s announced the downgrade on Tuesday.

The euro and European shares fell, ending a seven-day stocks rally, and Portugal had to pay more to sell three-month T-bills on Wednesday.

“It seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe,” Barroso told reporters in the European Parliament.

German Finance Minister Wolfgang Schaeuble called for limits to be placed on the rating agencies’ “oligopoly.”

Of the three major agencies, Moody’s and Standard & Poor’s are U.S.-owned and based. Fitch Ratings is headquartered in New York and London and majority-owned by a French company.

The European Union’s executive body is drafting proposals to regulate rating agencies; there has been political talk, but no action so far, about creating a European agency.

Michel Barnier, the EU official in charge of regulation, said later he could examine how to suspend the rating of countries that are getting bailout funds from the EU and International Monetary Fund. These are Greece, Ireland and Portugal.

Moody’s thumbs-down, coming so soon after a new center-right Lisbon government announced austerity plans going beyond international lenders’ demands, called into question the EU strategy for dealing with the euro zone sovereign debt crisis.

Moody’s said Portugal may need a second round of rescue funds before it can return to capital markets, just as European governments and banks are haggling over a second €120 billion [$172.3 billion] bailout for Greece, which has a much higher debt ratio.

“The key worry of the market is that the events that we’ve been seeing with Greece are being repeated with Portugal,” said WestLB rate strategist Michael Leister.

Ireland, the other euro zone country to have received a bailout, said on Tuesday it may have to make additional spending cuts next year to meet deficit reduction targets in its €85 billion [$122 billion] bailout plan due to an economic slowdown.

A Reuters analysis last week found that Dublin may also need a second bailout because it is unlikely to grow fast enough to make the envisaged full return to market funding in 2013.

Moody’s cited the EU’s crisis management, and specifically the attempt to make private creditors share the burden of all future rescues, as one reason for its steep downgrade.

The demand that banks and insurers share the risk is driven by growing public hostility in north European creditor nations to any further bailouts for south European states seen as having lived beyond their means.

But Moody’s said insisting on private sector involvement not only increased the economic risk facing current investors, but also “may discourage new private sector lending going forward and reduce the likelihood that Portugal will soon be able to regain market access on sustainable terms.”

Representatives of Greece’s major creditor banks met in Paris under the aegis of the International Institute of Finance(IIF), a banking lobby, to discuss a proposed rollover of privately held Greek debt, but there was no sign of agreement.

Banking sources said numerous issues involving credit ratings, interest rates, maturities and accounting consequences remained to be ironed out among multiple stakeholders and an agreement was only likely in September.

Rating agencies have warned they would be likely to treat any “voluntary” rollover of Greek bonds as a distressed debt exchange and declare it, at least temporarily, to be a selective default.

French banks have offered a plan under which banks would roll over about half of Greek debt that matures in 2011-14, putting another 20 percent into a “guarantee fund” of zero-coupon AAA bonds, and cashing out the remaining 30 percent.

German Deputy Finance Minister Joerg Asmussen put Berlin’s alternative proposal for a debt swap extending existing bonds’ maturities by seven years back on the table on Wednesday, even though the European Central Bank has warned against it.

Asmussen also told Reuters Insider TV it was “absolutely premature” to discuss a second rescue package for Portugal, and Berlin was confident the country could implement its reforms and get back on track.

“There is a new government in place so I would really suggest giving the government the time to do what the new government has promised,” he said. “We are confident they are willing and able to implement the first package and get back on track.”

France’s new finance minister, Francois Baroin, was just as dismissive of Moody’s action on Portugal. “A ratings agency’s view is not going to solve the matter of tension on sovereign debt markets and the budgetary crisis,” he said, adding he trusted Portugal’s new government to meet its deficit reduction target by 2013.

EU officials complain that the ratings agencies’ downgrades are a self-fulfilling prophecy, making it harder for countries under assistance programs to return to capital markets.

Underlying the debate is an increasingly prevalent view in financial markets — disputed publicly by EU governments — that Greece, and possibly also Portugal and Ireland, will have to restructure debt sooner or later and force significant losses on bondholders.

The more widespread that assumption becomes, the harder it will be to negotiate further official funding for Greece.

The International Monetary Fund board is expected to approve on Friday the release of a vitally needed fresh tranche of loans for Greece after euro zone finance ministers agreed on Saturday to pay their share.

The IMF’s new managing director, former French Finance Minister Christine Lagarde, warned the crisis could be comparable to the collapse of Lehman Brothers nearly three years ago unless action is taken to stave off a Greek default.

“I have very, very clear recollections of the first days of September 2008 and the last days. … Some people at the beginning of the month thought, ‘Not a big deal, it’s OK, it will teach those guys a lesson.’ The end of the month was not quite on the same page,” she told reporters in Washington.

But IMF sources say disquiet is growing among non-Europeans at the global lender over the risks of pouring more money into Europe’s debt crisis with no resolution in sight.

“It goes to show that this whole crisis isn’t over just yet. Even if they cough up some more money for Greece, and that looks like it’s a done deal, it’s not over,” said Jay Bryson, global economist at Wells Fargo Securities. “I would think it’s bad news for Spain and Italy as well.”

(Additional reporting by Ana Nicolai da Costa, Naomi Tajitsu and Alex Chambers in London, Walter Brandimarte in New York, Eva Kuehnen, Annika Breidthardt and Gernot Heller in Berlin, Leigh Thomas in Paris and Pedro da Costa in Washington; writing by Paul Taylor, editing by Jon Boyle and Leslie Adler)

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