Standard & Poor’s Joins the Herd
Standard and Poor’s decision to downgrade a large number of EU countries, on Friday, was widely expected; and, as I write, markets barely reacted. This is not surprising, as the downgrade had already been embedded in market behaviours.
There are of course notable political consequences, for example in what concerns the French presidential race. But from an economist perspective, this is really not a turning point.
There is nevertheless a remarkable news, that went almost unnoticed. In fact, S&P motivates the downgrade with a very clear analysis of Eurozone problems:
- A public debt problem.
- A Eurozone governance problem (‘an open and prolonged dispute among European policymakers over the proper approach to address challenges’).
- A structural divergence between core/surplus countries and peripheral/deficit countries.
The report concludes that the current discussion only revolves on the first of the three problems. Not only this is not likely to lead to a permanent exit from our woes, but even public finances are unlikely to improve:
As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.
Two points are worth noticing. The first is Germany is today a bit more lonesome. S&P joins the herd of those calling for a reversal of the austerity cure imposed by Germany and the ECB to the EMU. If market participants join the IMF (actually, ‘only’ the IMF chief economist, Olivier Blanchard), the OECD, and an increasing number of commentators, in calling for renewed focus on growth, maybe even Germany could finally decide to change course.
The second interesting point is that the report contains almost no reference to individual countries, but is centered around the Eurozone problems. This could explain why Fitch or Moody’s have not downgraded France, for example, while S&P did. By focusing on France alone, it is honestly hardly believable that it will default on its debt. If we widen the perspective to the EMU, as S&P (correctly in my opinion) does, then a downgrade becomes justified.
To conclude, a remark on which I will maybe come back later. It has been said, again and again, how disproportionate the power of rating agencies is. I believe that a serious debate on global economic governance cannot avoid dealing with the role of these agencies, that are subject to a number of potential conflicts of interest. It is an extremely tricky issue on which I reached no clear conclusion. It is clear, nevertheless, that part of the problem could be solved if only rating agencies, and financial markets in general, had a counterbalancing force. The political void that I already mentioned, creates room for excessive influence of rating agencies. The US example, last August, speaks for itself. The relation between markets and governments needs to be subject to checks and balances, like any other well functioning institutional arrangement.