Archive for category Secrecy

Who should we believe as the Greek and the wider European sovereign debt crisis spirals further out of control?

Should it be the financial markets and the media or the political institutions of state and the hard working officials of the EU and IMF?

In Brussels we trust?

The European Commission and many EU governments, especially in southern Europe, are getting increasingly rattled by their failure to convince financial investors, or speculators, that everything is going to be ok.

On Wednesday, commission officials were angrily threatening credit rating agencies after Standard & Poor had the nerve to give the thumbs down to the EU-IMF by downgrading Greek bonds to junk status.

The downgrade, the first time a euro area member state’s bonds have been junked, came as Standard & Poor also questioned Portugal’s sovereign debt status sending financial markets into a tailspin.

Furious officials have accused the credit rating agencies and markets of being out of step with reality. Be warned, they said, Brussels is ready to use new regulations to stop credit agencies from being the bearers of bad news that undoes all the hard work of officials.

“We have seen developments in the markets that raise some doubts about behaviours of some of the players,” said a Commission spokesman.

New regulations enter into force in December this year allowing the powers that be to make sure “the quality of the rating methodology and the ratings is watched over”.

“We would expect that when credit rating agencies assess the Greek risk, they take due account of the fundamentals of the Greek economy and the support package prepared by the ECB, IMF and Commission,” said the spokesman.

There is a palpable sense of official outrage that markets have not been convinced by the “carefully calculated” aid package for Greece backed by a “concrete” offer of €45 billion in IMF and euro zone loans.

“Isn’t that far more reflective of reality than some of the other hypotheses being put forward as absolute reality?,” said the spokesman.

Others are less convinced that perversly evil markets are undoing all the noble and good work of the officials.

Hugo Brady, a senior research fellow at the Centre for European Reform, told Reuters: “The markets aren’t stupid. They aren’t going to be fooled by elaborate peacocking displays. They can see when reactions are credible and when they are not.”

While not at all convinced that markets should dispose of the fates of nations, I am utterly unconvinced that the world would be ok if only we all trusted the officials.

Governments that raise investment to cover their debts by issuing bonds to be bought, sold and traded in the market have to live with the fact that investors are likely to assess the product before buying it.

There is no reason why – during a crisis or at any other time – a credit agency, or anyone else, should not critically assess Greek, Portuguese or other government bond even if their conclusions are deeply inconvenient for EU-IMF officialdom.

Financial markets, and state dependence on them, have played a major role in the banking fiasco, the resulting recession and the sovereign debt crisis that necessarily followed it.

If politicians, and the EU, were serious about taking on the financial sector, then they should have allowed banks to fail, without allowing the moral hazard of their dodgy dealing to be transferred to public authorities, making sovereign debt an issue.

Limiting the ability of financial players to issue damaging ratings would not make markets more rational. It might make life easier for officials but it would be bad for the public, in the marketplace of ideas, because it would further shroud the workings of finance and sovereign funds in obscurity and mystery.

Credit rating agencies (even if they made a hash of assessing toxic sub-prime assets held by banks before the crisis) have the same right to pronounce on sovereign debt as anyone else.

What’s next? Should the regulators start looking at the “methodology” of newspaper articles slating the EU’s cack-handed attempts to solve the Greek crisis?

Europe’s crisis will not get better or go away if people stop or are stopped from scrutinising or rating government bonds or EU-IMF packages.

European countries are deep trouble, problems that have been compounded by the junk policies, let alone bonds, of Europe’s governments and their Union. Let’s start a run on their authority.