Standard & Poor’s Threatens Europe. Will It Matter?

On the eve of an expected breakthrough in the Eurozone’s negotiations concerning the debt crisis, rating agency Standard & Poor’s (S&P) “warned” the area’s AAA countries that they were on “downgrade-watch.” Hardly just a warning, the statement doubles as a threat to political leaders to make market-appeasing choices, echoing S&P's recent US credit rating downgrade. Since the beginning of the global crisis, media, politicians, civil society and business analysts have criticized the role rating agencies like S&P have assumed in pressuring governments to take austerity measures that hurt millions of ordinary citizens. A Bloomberg analyst notes, for instance, that the agency should “back off” and refrain from narrowing the policy options of the Eurozone’s leaders.

By Brad Plumer

Washington Post
December 6, 2011

Back in August, Standard & Poor’s downgraded the United States’ credit rating after the debt-ceiling fight and. . .nothing happened. Investors kept rushing to buy up U.S. debt anyway, in part because disruptions in the rest of the world made those periodic spats in Congress look sane and sound by comparison. Now S&P is intervening in Europe, announcing that 15 euro-area nations (save for the already-on-notice Greece and Cyprus) are all being reviewed for a possible downgrade, depending on what sort of deal to save the euro zone emerges this week. Might S&P make more of a difference here?

Perhaps. For one, countries that get downgraded could see their borrowing costs rise if, say, investment funds have to sell off the bonds of affected states. But, more seriously, if any of the euro zone’s AAA countries get downgraded — say, France — then that would affect the credit rating of the European Financial Stability Fund, the main bailout fund in Europe which is supposed to shield threatened states from market panic. Already, the EFSF is too small to intervene in countries like Spain and Italy — it’s dedicated at least half of its $440 billion in lending authority to Ireland, Portugal, Greece and possibly some banks. Yet a downgrade could complicate the efforts to expand the EFSF further via leveraging and other financial maneuvers. That, in turn, might force Europe’s leaders to look for bigger bailout mechanisms — like, say, the European Central Bank.

So S&P’s moves might end up having a bigger effect in Europe than it did in the United States. Is it appropriate for the ratings agency to try to pressure European leaders in this way? Bloomberg quotes a number of analysts who are getting tired of S&P’s constant attempts to inject itself in politics. “S&P should back off,” says one. “It complicates the job of the EU leaders to resolve the debt problem.”

In that vein, it’s worth noting that S&P doesn’t exactly give Europe much room to maneuver. In its reasoning for the review, the ratings agency notes that various euro zone countries are now perceived as increasingly risky, thanks to the market panic over the debt crisis. But S&P also argues that there’s a “rising risk of economic recession in the eurozone as a whole in 2012.” Over at the Economist, Buttonwood comments: “To an extent, the euro zone is damned if it does, and damned if it doesn’t. Failing to have a plan to reduce its debts will result in a downgrade but austerity plans will hit economic growth that will also result in a downgrade.”