Rating agencies under fire for 'unjustified' Greek downgrades

When within three years the three large credit rating agencies, Moody’s, Fitch and Standard&Poor’s, issued no less than 33 downgrades or downgrade warnings for the Greek economy, it would appear reasonable for some to believe that their stand was a clear example of a self-fulfilling prophecy for the situation into which the country descended, Professor Manfred Gaertner of the University of St Gallen, Switzerland argued Tuesday.

Speaking to Deutsche Welle, he said such a belief gained credibility given that the problems of the Greek economy were clearly evident in advance to justify the credit rating agencies’ delayed response in 2009, when the crisis set in.

“The danger lies in the fact that an assessment can become a self-fulfilling prophecy. The unjustified and mistaken downgrade of a country can undermine the confidence of the markets in its credibility to such an extent that borrowing rates can reach such levels that would justify the unjustifiable downgrade, or even exceed it. All this can lead even an economically robust country to bankruptcy,” Gaertner said.

In a 2012 study, Gaertner and his colleague Bjoern Griesbach charged the rating agencies with moves during the crisis period that accelerated the speed of the eurozone’s excessively indebted countries’ slide toward economic disaster, as they continuously fed into investors’ insecurity and created a vicious circle of downgrades and borrowing rate rises.

He suggested that their stance led to the 2012 haircut on Greek bonds.

“The question we posed was this: Could it be that the unjustified downgrades forced Greece into the debt haircut? But instead of receiving a specific answer to this question, they keep telling us with self-complacency that they essentially managed to predict the Greek haircut.”

All three rating agencies expressed misgivings about the Greek economy in 2009, at least five years after their previous reports in 2004.

On August 1, 2014, Moody’s upgraded the Greek economy, forecasting 0.4 percent growth this year. Its previous forecast, on November 29, 2013, was for a 0.5 percent contraction.