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Generational Dynamics Web Log for 13-Jul-2011
13-Jul-11 News -- EU attacks ratings agencies, and moves towards 'selective defaults'

Web Log - July, 2011

13-Jul-11 News -- EU attacks ratings agencies, and moves towards 'selective defaults'

EU approves 'Selective Default' for Greece

EU attacks ratings agencies, and moves towards 'selective defaults'

European Union officials continue to be in a panic, after the Greek "contagion" spread to Italy this week. After Greece, Ireland and Portugal were forced in the last year to beg for bailouts just to survive, it now appears that the same thing is happening to Italy.

Vivian Reding calls for destruction of U.S. ratings agencies cartel

Vivian Reding calls for destruction of U.S. ratings agencies cartel

Italy's national debt is at 120% of GDP, the second highest in the euro zone after Greece, according to Der Spiegel. In recent months, Standard & Poor's and Moody's ratings services have issued warnings about Italy's debt rating, because of weak economic growth, low productivity, and a rigid labor market.

And now, on Tuesday, Ireland joined Portugal and Greece as the third euro zone nation to have its credit rating reduced to junk status by Moody's Investors Service, according to Bloomberg. Moody's said that it was probable that Ireland will need additional official financing and that investors will be forced to share in the losses (which would be a default for Irish debt).

European officials have been making one ridiculous proposal after another these past few months, including proposals to force investors to take "voluntary" haircuts on Greek debt. The utter absurdity of this has been hard to miss, and the ratings agencies are just saying so.

Declaring war on ratings agencies

So now EU officials are desperately turning to the one action that they have left: They're declaring war on ratings agencies!!

EU Justice Commissioner Viviane Reding has demanded the "destruction" of the ratings agencies, according to Frankfurter Allgemeine Sonntagszeitung. "I see two possible solutions: either get the G-20 to smash the cartel of the three U.S. ratings agencies, or establish independent ratings agencies in Europe and Asia. It should not be that a cartel of three American companies decide the fate of the entire world's economies."

In a speech on Monday, EU Internal Market Commissioner Michel Barnier said that the EU Commission in the future should no longer consider the ratings agencies in judging euro-debt countries such as Greece going through international bailouts.

Last week, Germany's finance minister described the "big three" credit rating agencies as an oligopoly that needed to be broken, according to Deutsche Welle.

German Chancellor Angela Merkel said, "It seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe. It is important that the troika [EU, IMF and European Central Bank] do not allow their ability to make judgments to be taken away. I trust above all the judgment of these three institutions."

I really have to laugh at this last statement. These three institutions have lied repeatedly in the last year, so I assume that when she says she trusts their judgment, she must mean that she trusts them to continue lying.

Approval for 'Selective Default' for Greece

Many of these lies are directly related to last year's €110 billion bailout of Greece. They kept saying that this would be enough, even though it was obvious to me and other people that it was mathematically impossible for that to be enough.

And now, Greece needs another €120 billion bailout, because a default would be disastrous, according to the ECB. Germany, the Netherlands, Austria and Finland are saying ABSOLUTELY NOT -- unless investors share in the bailout, which means a "selective default" for Greece.

There was a meeting of the Eurogroup finance ministers on Tuesday, and here's what Dutch Finance Minister Jan Kees de Jager said, according to Reuters:

"We have managed to break the knot, a very difficult knot, of a contradictory statement that you are saying that you want substantial private sector involvement and on the other hand you want to avoid a selective default.
Obviously this was a contradiction. So we have broken this knot and now we can do the work in the next few weeks. The (Eurogroup) working group can prepare. It has a broader mandate, several options.
[A 'selective default' for Greek debt] is not excluded any more. Obviously the ECB has stated in the statement that it did stick to its position, but the 17 ministers did not exclude it any more so we have more options, a broader scope to work with."

A knot?

I don't know, Dear Reader. I write about these things as if I'm talking about real people discussing real things, rather than what appear to be cartoon politicians saying cartoon things. I almost don't know what's real and what isn't any more with these people.

A couple of weeks ago, a Greek default was both unthinkable and unavoidable. Today, it's thinkable and unavoidable.

The ratings agencies have already stated that even a "selective default" will trigger a default rating, with all its consequences.

So it now looks like the Europeans are going to call the ratings agencies' bluff. It now appears that the EU is going to "permit" Greece to have a selective default, and the ratings agencies will then be challenged to carry out their threat, and take the blame for any adverse consequences.

Europe's financial system is a mess, and America's is close behind.

(Comments: For reader comments, questions and discussion, see the 13-Jul-11 News -- EU attacks ratings agencies, and moves towards 'selective defaults' thread of the Generational Dynamics forum. Comments may be posted anonymously.) (13-Jul-2011) Permanent Link
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Generational Dynamics Web Log for 13-Jul-2011 13-Jul-11 News -- EU attacks ratings agencies, and moves towards 'selective defaults'

EU attacks ratings agencies, and moves towards 'selective defaults'

Declaring war on ratings agencies

Approval for 'Selective Default' for Greece

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Generational Dynamics Web Log for 13-Jul-2011
13-Jul-11 News -- EU attacks ratings agencies, and moves towards 'selective defaults'