The New York Times spotlights Moody’s credit rating approach to Greece during the run up to the current crisis, echoing a number of events over the past few years that essentially amount to, positive outlooks followed by dramatically quick descents into very dark territories.
Moody’s held off dropping its strong A rating of Greece’s bonds despite growing political turmoil and economic woes through 2009. Investor fears over Greece’s short-term financing needs were “misplaced,” Moody’s said in a report in early December 2009. Twenty days later, after a review, the agency downgraded the nation’s debt, the last of the major ratings agencies to do so.
Moody’s response also seems familiar to anyone who paid attention to Enron or Lehman Brothers who both enjoyed favorable ratings until sometimes days before their complete collapse – essentially, that no one could have seen this coming.
”We never thought of such a catastrophic stress scenario in the euro zone,” said Sara Bertin, who was Moody’s lead analyst on Greece before leaving in spring 2008. “That’s the issue ratings agencies had with subprime. That’s the issue ratings agencies had in Asia, and that’s the issue the ratings agencies have in Europe.”
While I sympathize with Moody’s to some degree in their assumption that the EU would be unlikely to let one of their own sink beyond rescue, I am a little unclear about what information they were using to justify their rating, which stayed so strong for so long. They mention a checklist that their team uses but I am trying to figure out what checklist could not present at least a few causes of concern. This was, after all, following the revelation that the country has fudged their numbers used to be admitted into the currency in the first place. Furthermore, did the sovereign debt team not see the country’s spending and taxing behavior as some sort of red flag about potential problems in the near future? If not, what exactly were they looking at and what finally caused the to drop the rating so far, so fast. Was EU membership really the only thing keeping them afloat?
Again, I agree that the stability of the Euro members should have allowed some level of confidence going forward but weren’t other factors enough to invite some stronger scrutiny of the country’s ability to keep borrowing? This is especially important as this rating is what allowed Greece to continue borrowing far beyond what they should have. This also suggests that these ratings, as misplaced as they might have been, allowed other countries to dig deeper holes, exacerbating the already delicate situation. Finally, it lends a certain level of unease to the ratings still being applied to so many countries, causing market fluctuations that are increasing worrisome and suspicion. Do these ratings truly reflect the economic stability? Are they outdated? Are they running on trends or simple history?
The NYT article touches on possible conflicts of interest and issues with fees, but what concerns me most is the methods of measurement and how a group paid for the very task of determining the stability of investment opportunities could have been so late and/or so wrong on a case like Greece? Despite all the issues that could have raised concern, was EU membership really enough to justify propping up something so likely to stumble?