An excellent comment on Moody’s (via FB)

http://alexacos.amplify.com

 

Currently the whole finance system depends on the raters. I believe that once the Eurozone crisis has... been put under control we are likely to see important changes in the relative weight of raters. Until then raters are here to stay.

Before I can explain this I must note that there are four questions which the downgrading raises: (1) Is Moody's unjustified in the substance of the comments? (2) Was the timing and severity reasonable? (3) what are the consequences of the downgrading? (4) Is the government right to be angry?

To be able to answer the first question one must be able to see Moody's full report [and also have more time]. I do not have access to the report (it is available to premium subscribers, and also to the Hellenic Republic). In substance the Moody's comments seem to be similar to the latest troika comments: Greece should be doing more, faster, more effectively and actually believing in what it does.

The timing does seem unreasonable if one believes that the raters' obligation is simply to report when the action is over (with action being the meeting and decisions of the Eurozone summit on 25 March). Raters are taking a different view though: they believe that they should make their views known in advance so that the summits can factors the raters' views in their considerations. The severity (three notches) seems unreasonable especially since Moody's could have escalated this given the consequences (see below). Their argument would be that the substance of their assessment justifies the severity – to judge this one would have to resolve the first question.

The downgrading did not affect the spreads – these moved negatively today but not in any major way. So price speculators did not profit directly from this. So other than an insult to Greece what is the consequence? Ratings of the country are reflected also on ratings of banks and their bonds. Government bonds and bank bonds are now (through the ECB facility) some of the assets which Greek banks can provide to the ECB in exchange for short term liquidity. However both government and bank bonds are only "eligible" for ECB liquidity if they have a minimum rating from (depending on the bond in question) one or more raters. Moody's downgrading makes some of these bonds ineligible. So unless (a) the banks have a second rating or (b) the ECB accepts an assessment not based on the ratings of the raters, banks will face a liquidity squeeze at a time when they are dependent for their liquidity on the ECB and on deposits. This is very bad for the domestic economy because lack of credit will dampen growth.

So one can understand what the Ministry of Finance is angry.

As to change, it will have to occur because the ECB itself and the EU countries can not devise policy and find themselves ambushed by decisions of third parties who may not even understand them very well (long discussion but arguably the other two raters in particular have made analyses which misunderstand the eurozone's workings). But for the time being the ECB is committed to what it has announced and if it is to have a level playing field it will not change the rules in a radical way and immediately. But change will come.