The Great Greek Summit: A Retrospective

Clause 15 of the EU’s communique extending the terms of the Greek bailout provides a clue as to the real reason for the Summit. It reads

“15. We agree that reliance on external credit ratings in the EU regulatory framework should be reduced…and we look forward to the Commission proposals on credit rating agencies.”

Oh dear! As I discussed in earlier blogs, the rating agencies’ behaviour in the current crisis is culpable. The Sarkozy-Merkel meeting in June was supposed to demonstrate European Unity on the Greek issue and reassure investors that Greece’s debts would be covered one way or another. Sour grapes in the credit agencies led them to squeal ‘default’ and this effectively torpedoed the deal that the French had brought to the market. As the rating agencies’ scare campaign snowballed and the EU finance departments grappled with ways to appease the agencies’ bruised ego’s, financial markets became impatient and contagion set in…

…hence the Summit. All the EU heads of government were called in to show unity this time, even though it was Sarkozy and Merkel who sealed the deal the night before. But the striking feature of the agreement is how similar it appears to the original Sarkozy-Merkel agreement in June!!! Except, of course, for Clause 15…

…Oh dear! I doubt the Credit Agencies as yet really understand what they have done to themselves as they are used to having every government, corporate and financier kow-tow to their demands. This time, however, they have opened themselves up to potential supervision of the EU, new competition, or even exclusion from their traditional function. The EU may even discourage investors from acknowledging credit ratings in their guidelines! This could spell the end of their existence since, after all, they make their money from issuers who pay for a rating to satisfy investor demand – no demand then no need for a rating.

Add to their EU woe, the current stoush with the US Treasury over its AAA rating may well signal the end of the powerful, but unearned, position occupied by the Credit Agencies.