EU to censor Slapdash & Poor?

Oh what fun!

The Petit Grenouille and his Teutonic dominatrix are having a fit of carpet-biting over the rating agencies putting out news that is not to their liking, especially the latest goof about France’s AAA going to AA and back again at the hit of a computer key.

So typically they want to censor the agencies by barring them from changing their sovereign ratings i.e. their opinion of the credit-worthiness of a country rather than simply an investment vehicle. The EC has just put out a consultation paper (not that the EC has a stellar reputation for consulting the hoi-polloi).

So how likely is this to come about?

Well, for starters all the agencies are US-based and it is unlikely that the US government would lend a sympathetic ear to a proposal that would breach the US constitution.

But what would be the effect if did impose this piece of blatant censorship? At the moment critique, the agencies would have to state that they were unable to provide a rating for the country under review, as clear a signal as you could get that a downgrade was likely – except that investors would not know whether this would be AA+ or junk. The consequence is obvious.

Now, it’s true that the agencies are far from infallible. They made a complete horlicks of it when the ‘crunch’ arrived three years ago. S&P have just downgraded the Isle of Man to the same as the US – AA+, although it does not have a penny of sovereign debt and is barred by law from producing a deficit budget. And the Big Three – Moody’s, Fitch and Slapdash and Poor - have a dominant market position, so the spread of opinions is quite thin.

Of course, it is too much to expect that the EU is after wider competition. This has never been known in any circumstance affecting Europe. But we do get a clue that one of these cockamamie proposals is to require the agencies’ methodologies to be approved by an EU body that will be their minder. The intention is to impose uniformity, not competition.

In its characteristically underhand way, what the EU is really proposing is a European agency that would dance to the Ode to Joy, presumably headed up by Dr Pangloss.

But what they are not explaining to the public is that even if Club Med is rusticated, the debts, including many mortgages, will still be in Euros. Translating these into drachmas, lira or whatever would vastly increase the amount outstanding in devalued local currencies. The obvious move will be capital flight, which is already happening big-time. The City seems to be one of the beneficiaries, plus the London property market, which has seen busy activity from Greek buyers. Ah well, one man’s meat is another man’s poisson! (Yes, that’s supposed to be a pun, not a typo).