THERE is a certain irony in the Eurozone’s latest dilemma over Standard & Poor’s mass downgrade on Friday.
Eurozone leaders have spent months looking for convoluted ways to turn junk Greek ratings into triple-A rated debt backed by Germany.
The alchemy is to be achieved via a regional bailout fund, or complex structured product called the European Financial Stability Facility (EFSF), whose triple-A rating was to be an essential selling point for its debt.
But in the bunkers of Brussels, European regulators have also been engaged in a parallel project, which is to write ratings out of regulations entirely on the basis that they were not sufficiently harsh pre-2008.
But the problem of over-reliance on ratings is being exacerbated by politicians, not fixed. The more Europe’s political elites obfuscate and delay, the more desperate investors become for anything that smacks of clarity. A two-notch downgrade speaks louder than a mealy-mouthed, 10-page treaty draft.
The good news for the EFSF is that, despite the increasingly remote chance that it can keep its triple-A rating, investors have to put their cash somewhere. Many will judge that buying bailout fund debt could provide a good mix of German backing with slightly more Gallic yields.
The bad news is that no one is in a hurry to be the first chump buying up this new-fangled debt when they can simply wait for yields to go up.
Meanwhile, the malcontents of Paris have little time for their elites’ ambivalent reliance on and hatred of ratings. Last night, protesters against France’s downgrade marched on S&P’s Paris HQ with flags and banners: “RATINGS KILL,” they read.
Unfortunately, shooting the messenger doesn’t kill the problem.