3 reasons why the EU wants rating agencies to shut op for a while
The Financial Times Deutschland mentioned the fact that the EU is thinking about a ban on rating agencies issuing ratings on eurozone countries.
It could be said that the ratings agencies are like thermometers that provoke a rise of temperature.
But this is probably not the right angle to look at this possible action. The reason might be simpler, and related to the imminent EU-summit on the EFSF (European bailout fund).
- by converting the EFSF in a giga-CDO or CDS-structure (2 of the alternatives proposed), the guarantees given by the different countries so far could then be considered as debt by the rating agencies, lowering immediately the rating of France, and possibly some other countries.
- a downgrade of France is not so far away (after the US during the Summer), on the back of degrading public finances and the size and state of the big French banks. A French downgrade, a los of its AAA-status would endanger reelection of Sarkozy. There are therefore national political reasons also to make rating agencies shut up.
- the EU is considering a managed default of Greece. This could trigger a default of Portugal. But a default of Greece could also turn into realised losses for the European bailout fund (and the ECB). If that is the case, this would be counted as debt for the countries that have guaranteed the debt, again degrading their debt quality and ratings.
Therefore, the announcement of the EU plans to ban ratings, are not so innocent. They are considered in anticipation of the expansion of the EFSF and the default of Greece. A downgrade of any of the top quality (?) eurozone countries would make an enhancement of the EFSF impossible. This is the case, because the EFSF relies on.... a AAA rating to get its funding.