One Minute to Midnight for the Ratings Agencies

The credit rating agencies were clambouring over each other to downgrade Greece to ‘C’ during June, just one notch above default. Greece, they argued, was one-minute-from-midnight before going into default…

But now that Greece has secured funding for the next two years, including a rollover commitment from their major private creditors, how likely does the default scenario appear? Not very likely. The rating agencies have clearly misread the situation, ignoring the political resolve of the European Union and the seriousness with which Governments and Central Bankers view a Sovereign default. Greece never was one-minute-to-midnight and never deserved a ‘C-rating’.

So what do the rating agencies do now? First they appear as if they panicked and judged the situation poorly – something that they tell their clients they don’t do as they are supposed to be experts. Therefore they should admit their error of judgment. Second, they should immediately re-rate Greece back to a BB-B credit, or maybe even investment grade, since the likelihood of default is nowhere near imminent.

My guess, however, is that the agencies will do neither of these things as they will bury their head in the sand and defend their decision for months if not years. They will argue that the EU cavalry that eventually rode into town was an ‘extraneous’ factor that was not part of the ‘fundamentals’ etc etc. But these arguments are hollow as we all knew that the EU was the swing factor in any default scenario.

Just as the ratings agencies failed during the Enron/Worldcom crisis and the Lehman crisis, they have failed again during the Greek crisis. They have incited panic and caused investors to take losses on perfectly good investments. They are part of the problem. It should be one-minute-to-midnight for the rating agencies rather than for Greece.