OPINION

Rating the rating agencies

«If we really want to rub their faces in it, then the only way is to increase revenues and for every Greek to pay the taxes they are supposed to. If that happens, then we won?t need Moody?s or anybody else.? In his own inimitable style, Deputy Prime Minister Theodoros Pangalos?s blew open in Parliament on Friday an issue of public debate while displaying all the subtlety of a bulldozer trying to open a safe.

Although he was more forthright than others, the veteran PASOK politician was expressing an opinion that reflected the mood of many voters and MPs. His comments came just a few days after Moody?s, one of the three credit rating agencies that have been observing the Greek economy with the intensity a menacing stalker, downgraded Greece?s debt — already at junk status — by three notches, to B1 from Ba1 and suggested Athens would not be able to repay its debt without some form of restructuring. Moody?s also downgraded six Greek banks in the same week.

The feeling in Athens was that Moody?s provided a skewed assessment of Greece?s economic prospects and that the timing of its downgrade, just a day before Athens auctioned 1.6-billion euros? worth of sovereign bonds and four days before a crucial eurozone leaders? summit, was damaging.

Finance Minister Giorgos Papaconstantinou provided a cutting response to Moody?s latest rating. In a letter to the European Commission, the European Central Bank and the head of the Eurogroup, Jean-Claude Juncker, on March 10, he argued that Moody?s was only seeing the negatives in Greece and was making it much more difficult for Athens to access international markets and borrow at reasonable rates, thereby risking the creation of ?self-fulfilling prophecies.?

?Ultimately, Moody?s downgrading of Greece?s debts reveals more about the misaligned incentives and the lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy,? Papaconstantinou said in his letter. ?Having completely missed the buildup of risk that led to the global financial crisis in 2008, the rating agencies are now competing with each other to be the first to identify risks that will lead to the next crisis.?

Critics will say that the Greek finance minister?s response is just sour grapes from a politician who knows his country is struggling to get out of a deep hole but does not want to admit it publicly. In fact, even the most patriotic of Greeks would find it hard to disagree with much of Moody?s assessment. The ratings agency acknowledges the country has made ?very significant progress? in reducing its deficit but that the ?task facing officials and managers remains enormous.? It highlights the government?s problems in collecting tax revenues and indicates that the uncertainty over the EU?s permanent bailout fund increases the likelihood that Greece will have trouble paying off its debt.

While Moody?s judgment seems fairly sound, the structure that supports it is less so. It is the institutional role of credit rating agencies that should be called into question, rather than just their expertise. The system for providing credit ratings has been around since the 19th century and was created to give investors information about bonds. Gradually through the 20th century, insurance companies, pension funds and hedge funds looked to rating agencies for insight into the quality of investment products. The advent of securitization in the 1980s, when a number of assets were pooled together for investment purposes, meant that Moody?s, Fitch and Standard