Latest update May 10th, 2024 12:59 AM
Jan 20, 2012 Editorial
For a while now there has developed a new genre in writing, dubbed “writing back to the Empire”. Ex-colonials from the old boondocks like India and Africa turned their gaze onto their old ‘masters’ and, with their newfound confidence, used their own experiences to dissect the latter. That dissection is now being conducted from much closer home and from quite an unexpected source – the rating agencies that had been the bane of the old colonies.
A wrong word from one of the plenipotentiaries of these powerful organisations that would descend into the colonies was enough to plunge millions into poverty. Borrowing became more expensive or impossible and governmental programmes had to be scrapped. Now it is the turn of the masters that created the agencies to get a taste of their own medicine. And it can be very bitter medicine.
By now most Europeans probably scoff less at the American superstition of Friday 13th, as they were forced to absorb two powerful blows on that day last week. First, the Greek debt restructuring negotiation that had transfixed the world financial community, broke down. Most bondholders refused to take the voluntary 50 per cent “haircut” – the euphemism for debt write- off –, agreed last summer. While the negotiation may resume, this dramatically increased the chance of choatic Greek default.
Later in the day, more dramatically, Standard & Poor’s, one of the big three credit ratings agencies, downgraded nine of the 17 Eurozone economies. As a result, Portugal pulled off the hat- trick of getting a “junk” rating by all of the big three, while France was deprived of its coveted AAA rating. Yes: France. With Germany left as the only AAA- rated large economy backing the Eurozone rescue fund (the Dutch economy, the second biggest AAA economy left, is much smaller than the French economy) the Eurozone crisis became that much more difficult to handle.
Since then, the EU leaders have tried to put a positive spin on the news. “In the final analysis, this doesn’t change anything,” French President Nicolas Sarkozy said. “[We] must cut our deficits, cut spending and improve the competitiveness of our economies to return to growth.” Economies like France and Italy – have also renewed urgency to resolve a pending European Union fiscal plan as leaders from the European Central Bank (ECB) have expressed concern that a common budgetary pact is being watered down during negotiations.
The common fiscal plan, which the United Kingdom has already opted out of, originally sought to put into place a system of automatic sanctions for countries surpassing deficit limits and is widely perceived as needing to meet certain standards laid out by the ECB. Among its major goals is to provide additional cover to the ECB in buying up government bonds from troubled Eurozone countries that have seen borrowing costs soar in recent months. An ECB purchase of such bonds helps to push down borrowing costs.European leaders had originally sought to have such an agreement in place by the end of March, but these developments have forced a shortened timetable, with negotiators seeking to sketch out a final agreement by the end of this month. The fiscal agreement would only apply to member states when they join the Eurozone, meaning the Czech Republic, even if it signed the agreement, need not meet budget restrictions immediately.
The S&P downgrade has again drawn into focus what many now see as a nefarious role that ratings agencies play as European countries seek to stave off a renewed recession. Ratings agencies faced scathing criticism for their role in the 2008 financial crisis, when many agencies gave positive credit ratings to troubled firms like Lehman Brothers right up to the day the investment bank declared bankruptcy.
When these ratings agencies had consigned half the world to unremitting poverty, there were no squawks. Even when parts of that world, such as the Far East had pulled themselves up, they were shown no mercy when they faltered as in 1997. The shoe is now on the other foot.
Correction
Yesterday’s editorial read, inter alia “Guyana experienced an outbreak of cholera during the 1960s”. That should have read, “Guyana experienced an outbreak of polio during the 1960s”. We regret the error.
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