Do the credit rating agencies want the skin of the euro? After having downgraded with a vengeance, for eighteen months, the public debts of the peripheral countries of the eurozone, some of which were reduced to junk bond status, the agencies are now threatening to declare Greece to be in default. Why? Because European countries have dared to consider voluntary participation of private financial institutions (banks, insurance companies, management funds, etc.) to rescue Greece. It’s a way to suppress a solution that would save Greece from a bankruptcy that the agencies think, purely by chance, is almost certain.

As if the markets were not already sufficiently rattled, the agencies are also taking on the club of countries with the highest rating, triple-A (there are fourteen of them). In recent weeks they have announced that France or Austria could still lose, more or less for the long term, that ‘AAA’ rating that allows them to access cheaper financing in the markets.

Agencies systematically ignored the structural problems of peripheral economies

"Failed". The eurozone is not the only bait in this frenzy, however: following on, they have threatened to downgrade the United States and Britain, which has led many economists to wonder what game the agencies are playing. "If the safest asset, U.S. debt, is no longer risk-free, it will change the world," says Laurence Boone, professor of economics at the Ecole Normale Superieure de Cachan (Val-de-Marne).

Agencies are risking destabilising the financial world, which will be deprived of safe investments, and that could bring on a new global crisis. Although the agencies have responded by saying that they are merely doing the work they are paid to do and that the market does not need them to become a religion to live by, two studies reveal a direct responsibility for the current financial instability. The studies come from the International Monetary Fund (IMF) – this last February – and the European Central Bank (ECB) – published a few days ago.

In both cases the conclusion is the same: the downgrades, which ratify the fears of the market even as they create them, directly affect investors, who automatically demand higher interest rates to cover the extra risk. In a debt market as highly integrated as that of the eurozone, these degradations have an especially destabilising effect on all the other countries, including the better-rated. Particularly because their financial institutions carry debt from all the countries in the eurozone, a downgrading automatically affects their creditworthiness.

As the IMF highlights, the agencies not only failed to see the U.S. sub-prime crisis coming in July 2007 – products that were rated ‘AAA’ right up until the day they collapsed – they also failed to predict the sovereign debt crisis in the euro zone. It’s an error they have been trying to sweep under the carpet in a frenzy of downgrading.

The history is damming. For ten years, the agencies, especially the three giants of the sector, Moody's, Standard & Poor's and Fitch, systematically ignored the structural problems of peripheral economies. It was not until December 2009 and the admission by the Greek government that it had lied about the extent of its deficit that the cycle of downgrading began.

Greece was rated ‘A’ at the time, the fifth-highest score on a scale of twenty. Eighteen months later, Greece was down to junk bond rating: on May 9, Standard & Poor's downgraded Greek bonds to ‘BB+’, or speculative grade, followed by Fitch on May 31 and on June 2 by Moody's. The descent into hell of Ireland and Portugal has been the same, even though their debt still hovers just above speculative grade.

Bail-out merely ensures liquidity for one year, not solvency

Liquidity. Just like wild ducks, agencies flock together. Each time they degrade a country, they do it a few days apart and deliver almost the same analysis. Often they are following the fears of the market, but they are also anticipating them, which leads to some beautifully self-fulfilling predictions. The downgrading requires investors to sell for supervisory purposes (under prudential regulations), which lowers the value of bonds and confirms the market's fear of a collapse of the debt...

By mobilising tens of billions of euros, the eurozone and the IMF have saved Greece, Ireland and Portugal from a default that they dismiss politically. "For the agencies, however, the bail-out merely ensures liquidity for one year, not solvency," says Laurence Boone. This, in particular, is why the agencies believe that the probability of a default by Greece is "at least 50%" in three to five years – at the risk of destabilising the entire euro zone. The European Commission does not intend to let that happen.