The power of nothing

EPP Summit October 2010

What actually happened yesterday was a single credit ratings agency, an agency with a lamentable record, especially in respect of the banking crisis, downgraded the France’s debt by one notch from AAA to AA+. That this should lead a plunge in the euro, panic buying of Italian bonds by the European Central bank, reignite the eurozone crisis (which had rather gone off the boil since Christmas) renew the political spat between eurozone leaders and Britain, and further damage the diminishing election hopes of French president Nicholas Sarkozy says much about the crazed version of capitalism we’re operating.

It’s not as if the move was unexpected – and markets are supposed to good at ‘discounting’ things that are likely to happen. Standard and Poor’s (S&P) had warned in early December that such a move was imminent. So had Moody’s, another powerful agency. The move was modest, France’s debt is now rated as ‘high quality’, the same level as that of the US, which has suffered few ill-effects from a similar downgrading in August. What we have is a panic over-reaction to something that was widely expected and is in any case no big deal.

The rating of agencies like S&P have no objective value whatsoever. This is an agency that was perfectly capable of rating the junk ‘securities’ that caused the global financial meltdown in 2008 as ‘AAA’. They do not publish their criteria and give only the most cursory explanations of their decisions. So suspicion lingers that those decisions are based on ideology, prejudice and even spite. They go after policies and even politicians they don’t like. Thus Obama (seen as left-wing in American terms) and Sarkozy (who is just French) and Papandreou (an actual socialist) get it; Cameron and Merkel get off. And the markets will always respond to herd-like to signals that confirm their own deep seated prejudices

While Moody’s is expected to follow suit and downgrade France in the near future, the third big agency, Fitch’s, will not. As recently as Wednesday, Fitch’s went out of its way say it would not be changing France’s AAA credit rating. The fact that Fitch is owned by the French billionaire Marc Ladreit de Lacharrière is unlikely to be a coincidence.

To look at it another way, S&P may well be right about France. Its budget deficit and national debts are quite high by historical standards (although not particularly by international standards). No one seriously believes that France is about to default on its debts but to suggest that France’s credit-worthiness might be just a tad below the very highest level is not unreasonable. But there are questions of timing and consistency. Why now? And why France?

The timing, with Greek debt talks at a crucial stage and the situation delicate in Italy and Spain, is incendiary. France’s debt position has not worsened of late and if anything, the government of François Fillon has been tightening the screw, with new tax rises set to hit middle-class French families. Last month, Christian Noyer, head of the French central bank, caused a storm by saying Britain should be downgraded before France because it ‘has higher deficits, as much debt, more inflation and less growth than us’. The eurosceptics and Francophobes who now dominate British political debate may not like it, but M Noyer has a point: all of those thing are (more or less) true. And last night, Michael Fuchs, deputy leader of Germany’s ruling Christian Democrats stirred the pot. ‘If the agency downgrades France, it should also downgrade Britain in order to be consistent,’ he said.

Such is the power of the agencies, a power that is both arbitrary and unaccountable, that our leaders would rather spat among themselves over the worthless baubles they hand out than reform them or the unhinged system of which they are a part.