European Debt Crisis

Rating agency again steps into political fray

Heidi Moore Dec 6, 2011

Kai Ryssdal: Say what you will about the credit rating agencies — and plenty of people have had their say — but you’ve got to admit S&P and the gang know how to make a splash.

Yesterday, Standard & Poor’s warned 15 European countries — Germany and France among them — that their credit rating was at risk of a downgrade. Today, S&P followed up by putting Europe’s big bailout fund on similar notice.

Granted, some flavors of European bonds might not be an especially good investment right now, but our New York bureau chief Heidi Moore explains the real reason S&P is reminding us of it now probably has more to do with certain European political meeting at the end of the week.

Heidi Moore: In the runup to a European summit this week, a lot of government officials there were outraged that Standard & Poor’s threatened to slash the credit rating on their bonds. Some vowed to investigate the ratings agencies. U.S. officials reacted the same way when S&P cut Washington’s top-notch rating in August.

Lawrence White: Nobody likes to be downgraded, and so there’s always a lot of political huffing and puffing immediately after a downgrade.

That’s Lawrence White, a professor at New York University’s Stern School of Business. His colleague, Richard Sylla, points out investors seemed less concerned than politicians.

Richard Sylla: The response of the markets was, you know, ho hum.

That’s because the bond market decided months ago that Europe had a slim chance of pulling its financial act together.

Peter Boockvar is a portfolio manager with Miller Tabak.

Peter Boockvar: The bond market is many steps ahead of the ratings agencies. Always has been and always will be.

So right now, S&P is directing its messages towards politicians who need to cut deficits.

Mark Cliffe is the chief economist for ING.

Mark Cliffe: I think the ratings agencies clearly are wielding some political power here, but I think we have to recognize that they were given some political power in the first place by policymakers.

The ratings agencies were created by Congress in the 1930s. Here’s Sylla again.

Sylla: The government said you can prove that you’re investing safely if you buy the securities that are rated investment grade by Moody’s and S&P and Fitch and so on.

S&P said today that European leaders earned their warning with their “hesitant” and “piecemeal” efforts to fix the huge debt problem. So you could say that the ratings agencies have learned from their political creators how to grab a headline.

In New York, I’m Heidi Moore for Marketplace.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.