European leaders and policymakers tend to take a dim view of credit ratings agencies – those watchdogs of Anglo-Saxon capitalism who fell asleep on the job while Lehman Brothers and other banks were gorging themselves on toxic securities.
But they may want to read the latest report on Greece from Fitch, one of the largest ratings agencies. It suggests that Eurozone governments and the International Monetary Funds should be preparing to write another cheque to Athens. It also hints that any delay in paying Greece’s bondholders – an idea that has increasingly gained traction among policymakers – could have nasty consequences.
Fitch on Friday lowered Greece’s long-term credit rating one notch to B+, with a negative outlook, citing the scale of the challenge facing the country as it tries to implement a radical austerity programme to shore up its finances.
To Fitch’s analysts, the prospects are not good: The agency sees technical and political “obstacles” complicating the government’s plan to raise some 50bn euros through a massive privatisation drive. As such, it expects that “substantial new money will be provided to Greece by the EU and IMF.” Just how much? Fitch doesn’t say, but private analysts have estimated that Athens is facing a funding gap of some 60bn euros over the next two years.
Fitch has also waded into the debate over a “soft” restructuring or “re-profiling” of Greece’s debt – two euro euphemisms for extending the maturities of Greece’s bonds. The idea was publicly floated for the first time this week by Jean-Claude Juncker, the Luxembourg prime minister and president of the eurogroup of finance ministers, and Olli Rehn, the economic affairs commissioner.
It has support in Berlin and other national capitals, where politicians are understandably queasy at the thought of sending more taxpayer money to Athens. But it is fiercely opposed by the European Central Bank, which is holding billions of euros of Greek bonds, and is worried that any sort of restructuring would further unsettle markets.
On this one, Fitch is in the Frankfurt camp. By whatever name one calls it, Fitch says it would view an extension of maturities as a “default event”. That should be of keen interest to those investors holding billions of euros in credit default swaps, a form of derivatives contract that pays out in the event of a debt default. Many of these CDS investors are the same “speculators” who have been so vilified by continental politicians over the last year. (Just to be clear: The final determination on whether the contracts should be paid lies with the International Swaps and Derviatives Association – not the ratings agencies).
Still, European leaders were hoping to make any restructuring so soft that it would not be deemed a formal default. Fitch’s opinion should put them on notice. Fitch also warned governments against any “coercive” moves to rope private creditors into a supposedly voluntary restructuring. Doing so, it said, would “adversely impact financial stability across the euro area.” Evidence of coercion would also tarnish the credibility of the eurozone’s new 500bn-euro bailout fund, the European Stability Mechanism, as well as ongoing rescue programmes in Portugal and Ireland.
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