That’s essentially the sentiment behind this piece from a British MEP last week, and my language is actually a bit saltier than that, especially for the credit rating agency kabuki that has been going on over the past few days.
Here is the credit rating agency idiocy: and no, I’m not calling the rating agencies idiots (unless they don’t follow through with what they should). The specific details don’t really matter to most reading this, but if you want to get an idea of the background, here:
- The Rating Agencies are Displeased
- S&P Throws the ECB a Lifeline?
- The Greeks are Doomed With or Without a Loan
That’s probably enough of a flavor. All the major credit rating agencies have Greece at the lowest possible rating without being declared in default. Default means something specific for specific bonds – it means you can’t or won’t pay the promised cashflows in the full amount on time. (Yes, it can get more nit-picky than that.) It doesn’t matter if the creditors “voluntarily” “forgive” part of the debt — if you don’t pay the obligations, it’s a default. And it’s pretty important for the credit rating agencies to stick to their definitions on this, because quite a bit does depend on it.
So what the Euro politicians and the ECB (what’s the diff?) have been trying to do is to keep crafting something that won’t totally soak the EU with costs (i.e., they don’t want to pay off all the Greek debts… hell, would you?) but they are trying to rope other groups into putting an imprimatur on it. The ECB/eurozone figures if they’re going to spend their reputation on Greece, they might as well drag some private parties down with them. And there’s nothing in it for the credit rating agencies–their reputation was already badly burned with the structured financial products meltdown. When you try to get them to say a default isn’t a default on something not so esoteric…. then people are not going to trust them at all.
Because there are contracts that depend on credit rating agencies’ announcements of default. Say… oh… credit default swaps. There will be a lot of extremely pissed-off people if they find that the CDSs they have are worthless because the credit rating agencies can be bought off politically. Because some of the most active credit-protection products out there are against debt issued by governmental bodies, whether at the municipal level or the sovereign level.
Anyway, the Euro bigwigs have been monkeying with these deals for over a year, I’d say. They come up with something new, waggle their eyebrows at the credit rating agencies, and the credit rating agencies sniff at the polished dog turd and say “Hmmm, still smells like shit to us.”
Let’s hear from the ever-spicy Financial Times on this brou-ha-ha:
But this is the same Mr Trichet that has placed the fate of Greece–and arguably the entire euro project–in the hands of these rating
agencies. The ECB has said it would not accept Greek collateral in its
liquidity operations if Greece was downgraded by the agencies to
default or selective default. This week, S&P said it would lower
Greece’s rating to selective default if a plan by banks to roll over
their Greek debt holdings were implemented. Analysts believe the
entire Greek banking system, whose borrowings from the ECB were about
€100bn last month, would topple if the central bank stopped accepting
its collateral. But the effects of a Greek banking collapse could be
more far-reaching. Investors fret about the exit of Greece from the
euro and even the break-up of the single currency.
All this puts rating agencies in an uncomfortable position. The agencies themselves support efforts to reduce official use of ratings. But their ratings are hardwired into large parts of the financial system, from bank capital rules to investor mandates on what they can own.
The ECB’s position sums up where we are in the euro crisis. Policymakers are caught in a knotty web of semantics that brings to mind Alice Through The Looking Glass. In that book, Humpty Dumpty remarks: “When I use a word it means just what I choose it to mean–neither more nor less.”
Authorities seem to have lost sight of what they ultimately want to achieve. Investors and some former policymakers that have left the fray are clear on this: a proper default with big haircuts for investors, or some kind of guarantee from the rest of Europe for Greece’s huge debt pile is needed. The end result of this unseemly situation is a near-universal belief among investors that the ECB will have to back down and still accept Greek collateral.
And for an alternate view, I present without quote or comment: Time for Flush Germany to Put Europe First.