As the clock resets on the Greek crisis and the fog of questionable financial shenanigans begins to lift, it appears that a new game is emerging within the confines of the default arena. The three main ratings agencies that enjoy near monopolistic power, granted by government decree, are in a rush to downgrade the sovereign debt ratings of the European peripherals. It seems as if Fitch, Moody’s and S&P are leading the race to downgrade the fastest as if to put more and more pressure on Brussels in a game of CHICKEN DEFAULT. As it is now obvious to all, the ECB and the EFSF are trying to prevent a legal definition of DEFAULT from occurring so as not to pay out on the credit default swaps, especially to all those empty creditors.

Also, the ECB is on the hook for a large financial loss if the ratings agencies declare the present French proposal for Greek debt relief to be a default. Why are the ratings agencies acting so expeditiously–Moody’s downgraded Portugal today? Has anything changed in the PIIGS recently that Moody’s is now in a rush to default judgement? The answer to me lies in the fact that the AGENCIES are pushing to make downgrades A SHOT ACROSS THE BOW TO THE ECB AND THE EUROCRATS TRYING TO HOLD THE EU TOGETHER.

Last year, there was several stories about the European financial elite seeking to create a new ratings agency to deal solely with the issue of sovereign debt. The Brussels politicos were and are looking for an alternative to the existential power placed into the hands of U.S.-based ratings agencies. A mere downgrade can wreak havoc on a nation’s credit stature and thus the interest cost it has to pay in the market. Many pension funds and other investors are prevented from buying debt below “AAA” status, so a downgrade can lead to a rash of selling into a market of now-limited participants. The effect can be devastating to an economy under budgetary stress and bring down governments.

This is a powerful cudgel in the hands of private enterprises. The SUBPRIME CRISIS revealed that the RATINGS AGENCIES are conflicted in their analysis as large contracts from Wall Street seemed to cause a bias in their risk analysis. Credit analysis of stress in the credit quality of MBS and CMBS securities was slow to uncover any problems and the AAA quality was not called into question until CREDIT STRESS MORPHED INTO A FULL-BLOWN CRISIS. Now it seems that MOODY’S, FITCH and S&P are attempting to salvage their reputations by a rush to downgrade the sovereign debt of the PIIGS. It appears to me that the AGENCIES are merely sending the message: If you stick your finger in the financial dike of GREECE, there are other dikes that are subject to cracking.

If the Eurocrats continue to threaten and cajole the ratings agencies, there is a price to be paid at some point. The issue of DEFAULT is a very real problem in today’s financially engineered world. At present, the POLITICIANS ARE PISSED THAT THEY MAY BE SUBJECT TO THE POWER OF THE MARKET RATHER THAN THE CAPRICIOUSNESS OF BRUSSELS. Remember, it was a European FOOTBALL official who stated, “FOR OUR FRIENDS WE INTERPRET THE LAW; FOR OUR ENEMIES WE ENFORCE IT.”

How all this plays out is an unknown but as today’s downgrade of Portugal showed, a sudden downgrade on any of the peripherals can swiftly impact markets. The EURO FX was sold to its lows after the announcement. The S&Ps broke initially and NOTES and BONDS RALLIED. The fact that the GOLD opened strongly higher after a very weak close on Friday leads one to wonder which of the ratings agencies’ clients had access to the announcement.

Tags: , , , , , , , , , , , , ,

4 Responses to “Notes From Underground: SOVEREIGN DEBT DOWNGRADES–WHEN AND WHY?”

  1. Michael Greenberg Says:

    Maybe the credit agencies are using their power to call a default as a bargaining chip with the sovereigns so they (the credit agencies) are not held liable for failing to warn against the mortgage backed securities debacle.

    Just sayin’.

  2. Seanm Says:

    An extension of the extortion racket. Pay us the booty or we will let the “Kontagion Kraken” off the leash.

    With US based “friends” like this, who needs enemies.

    Makes Ghaddafi sound like Ghandi.

  3. yra Says:

    Both points are well taken.The raters certainly don’t want to look as bad as they did in SUBPRIME and the shake down effect is a response to the Europeans dithering about the default payout issue which calls to question the rating agencies and of course ISDA—seems like a game of kicking the contract down the road

  4. Debt Says:


    […]Notes From Underground: SOVEREIGN DEBT DOWNGRADES–WHEN AND WHY? « Notes From Underground[…]…

Leave a Reply

%d bloggers like this: