Is Standard & Poor's playing politics?

Tuesday, 6th December 2011, 3:03pm

Standard and Poor's blitz of eurozone ratings warnings yesterday, just days ahead of a do-or-die EU leaders summit, greatly raises the already immense pressure on that summit. An article by Bloomberg News today asks the question on many people's minds: is S&P once again injecting itself into politics?

What S&P has done is not only ratcheted up the stakes of the EU meeting on December 8-9 – it's also hobbled it. A downgrade watch, though not as bad as an actual downgrade, already causes tremendous unease among banks and investors. Indeed, a whole plethora of banks will have their ratings downgraded automatically if core nations like Germany and France lose their top-notch credit standing. The EFSF bailout fund will also lose its AAA.

At the summit, Angela Merkel and Nicolas Sarkozy will have this hanging over their heads: a debt downgrade not only if they don't produce a resolution to the euro crisis, but if they don't provide one that meets S&P's approval.

'The upcoming European summit,' S&P says in its report, 'provides an opportunity for policy makers to break the pattern of what we consider to have been defensive and piecemeal measures to date, overcome individual national interests and preferences, and advance a credible response to the crisis that would go far towards restoring investor confidence.'

Bloomberg News sees this as the second time S&P is playing politics – the first time was four months ago when the agency downgraded the US, citing Democrat-Republican gridlock. Its article points out that credit-ratings agencies have been discredited (as it were) by failing to warn on the subprime fiasco.

Still, it's hard to see what a debt ratings agency is supposed to do in unchartered situations such as these. The eurozone's problems are hooked to political ones precisely because its leaders have made it that way. The EU is facing a severe credit crunch and the euro may break up any day, with seismic financial and economic consequences. If ratings firms were slow on the uptake in the last financial crisis – well, at least they seem to be trying not to be so now.

S&P may have chosen a slightly calmer period for its warnings, perhaps. But if not now, then when?

More articles from: Clarissa Tan | this section

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