Article first published as Has Unfair Downgrading by Rating Agencies Exaggerated Europe Debt Crisis? on Blogcritics.
The IMF expressed concerns over high vulnerability of sovereign balance sheets to growth shocks, releasing its semi-annual “Global Financial Stability Report
(GFSR)” today, September 5, 2010. The report said the recent sovereign debt crisis in Europe highlighted increased vulnerabilities of banks and sovereign balance sheets emanating from the Euro crisis. Though mature economies are transitioning from temporary support to self-sustaining private demand, the policy makers must stick with fiscal tightening and regulations unless private demand becomes more self-sustainable.
(GFSR)” today, September 5, 2010. The report said the recent sovereign debt crisis in Europe highlighted increased vulnerabilities of banks and sovereign balance sheets emanating from the Euro crisis. Though mature economies are transitioning from temporary support to self-sustaining private demand, the policy makers must stick with fiscal tightening and regulations unless private demand becomes more self-sustainable.
The IMF is still not ready to advocate the withdrawal of fiscal support,
(termed nicely as “temporary support” in the report) unless the “still-impaired financial sector” is proven to be out of risk from its toxic mortgage debt assets. Until then Fiscal tightening measures have to be continued, and of course, without caring for working class people’s protests and agitations, at the cost of budget spending for the people.Government Role in Recovery
The IMF report acknowledged the role of the governments in recovery from the financial crisis. It said in its report, “To a large extent, the apparently modest capital needs of U.S. banks reflect the large scale of government-sponsored enterprises and other government interventions without which those needs would have been substantially higher. This highlights the extent to which risk has been transferred from private to public balance sheets, as well as the need to address the burden placed on public institutions.”
Even as recognizing this, the IMF looks for self-sustaining private demand where private demand is still based on temporary support from the government. The governments need to interfere where private firms that are “too-important-to-fail,” (referring “too big to fail”) fail to deliver, but private firms do not come to rescue the government from the difficulties of maintaining fiscal discipline and from lacking funds for social welfare measures. Even then, the governments are inclined to resort to spending cuts, withdrawal of welfare measures, wage freezes, benefit cuts and so on.
The report majorly pointed out that the setback in progress toward financial stability was precipitated by turmoil in the sovereign debt markets in Europe, where increased vulnerabilities of sovereign and bank balance sheets became the focus of market concern.
This observation is particularly reveling if not confusing. It states that the setback in progress toward financial stability was PRECIPITATED by debt crisis, meaning the setback in progress was already underway that was only precipitated by the sovereign debt crisis. Therefore, even before debt crisis, there was a setback to recovery and it was only augmented by the debt crisis. It seems here, the IMF was admitting the recovery was just a notional or nominal but in forward direction. So the European debt crisis was the continuation of the global financial crisis but not itself a fresh one.
If this was the actual case, the countries like Greece, Portugal and Spain were penalized by the rating agencies by downgrading their sovereign ratings thereby increasing the debt cost for those countries. If the ratings agencies did not resort to downgrading the national debts, the recovery process in the European countries would have proceeded smoothly without interruption of increased debt costs. The move of the rating agencies was quite unfair and irresponsible.
Rating Agencies
The same observation was noted in the IMF report. Though the report acknowledged, in general, the credibility of the credit rating agencies
, it issued warning to regulators and ratings followers to avoid risks. The report said the regulators should remove references to ratings in their regulation where they were likely to cause cliff effects. Central Banks were asked to establish their own credit analysis units.
, it issued warning to regulators and ratings followers to avoid risks. The report said the regulators should remove references to ratings in their regulation where they were likely to cause cliff effects. Central Banks were asked to establish their own credit analysis units.It was advised in the report to check whether the rating agencies were using standards set by Basel II. Rating agencies should be overseen for credit metrics reported; ratings models backtested and ex post accuracy tests performed. The IMF report said the “regulators should restrict ‘rating shopping’ and conflicts of interest arising from the “issuer pay” business model by requiring the provision of more information to investors.”
The Greece Prime Minister urged the US President in April 2010 to control the Wall Street investment banks from exploiting, speculating and betting on Greece default to extract higher rates of profits. The US President of course, simply ignored the Greece’s request and the Wall Street bankers continued their betting on other European countries’ defaults.
If one can recall, the German Chancellor Angela Merkel hesitated for a long time before announcing special bailout package of €110 billion for Greece. Bond spreads for Greece and Portugal were shot up above 8 percentage points, as Germany dragged on its decision in providing bailout package. At one time, the President of France Nicolas Sarkozy was reported to have threatened Germany that he would withdraw from Eurozone if Germany did not cooperate. Then, France was unwilling to ask for IMF aid, but Angela Merkel finalized aid package that included a part from IMF.
When all of these factors are gathered at one place it is understood that the economic, particularly the financial contradictions are soaring up between matured market economies. In the wake of global financial crisis, the matured economies are in contradiction among themselves, with the developing economies led by emerging economies. At the same time, the matured economies are compromising among themselves knowing the fact that they are so intertwined with each other that a crisis in a country had every reason to spill over to the other countries.
Unless the basic contradiction between the toiling masses and the exploiting classes is resolved by some means, the crises would be haunting the capitalist states, no matter how many reports and alerts are delivered by the Bretton Woods sisters.
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