S&P Downgrades Ratings of 9 European Nations, Affirms Seven

The Bloomberg reports,

France and Austria lost their top credit ratings in a string of downgrades that left Germany with the euro area’s only stable AAA grade as Standard & Poor’s warned that crisis-fighting efforts are still falling short.

France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, the rating company said in Frankfurt late yesterday. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative watch. Spain and Italy were also among the nine nations downgraded.

It’s important to stress that the S&P has only been reacting to what the market has already done.

Major credit ratings in the US are limited by regulation, particularly the Nationally recognized statistical rating organization, thus operates as a quasi-cartel, specifically, the big three: S&P, Fitch and Moody’s. Since these firms apply ratings not only to private companies but to sovereign securities, they are largely sensitive to political influences.

S&P’s recent downgrade of US debt was apparently timed during the congressional debate on the debt ceiling, perhaps or most likely aimed at influencing the political outcome, which of course earned the ire of the Obama administration.

Nevertheless so far the markets has proven S&P’s US downgrade as largely ill-timed as 30 year US treasury bonds gained an astounding 35%!

This seem to validate predictions of deflationists but for the wrong reason. Global bond markets have been manipulated by regulation (Financial Repression-forcing financial institutions to hold or own sovereign papers, based on Basel Accords) and by monetary policies. The outperformance of the US bonds has been magnified by the Euro crisis, and importantly, the US Federal Reserve act to monetize debts. Deflation proponents should thank the US Federal Reserve for actualizing most of their predictions.

The red circle shows of Fed’s purchases of long term treasuries (chart from Cleveland Fed)

Going back to the issues of debt, a similar furor today over S&P’s European downgrades seems to hug the headlines as Europe’s politicians/bureaucrats contest S&P’s decision.

From the G7Finance.com

The EU’s top economic official criticised Standard & Poor’s downgrades as “inconsistent” on Friday and said the currency area was taking action to resolve its debt crisis.

“After verifying that this time it is not accidental, I regret the inconsistent decision,” EU Economic and Monetary Affairs Commissioner Olli Rehn said in a statement, taking a jab at the ratings agency in recalling its November accident in which it informed some clients of an erroneous French downgrade.

Anyway, these represents no more than histrionics to the crisis havocked Eurozone.

Bottom line: you can’t count on what credit rating agencies say. And you can’t rely on them to materially influence the markets. Rather, these firms act largely on market’s influences, except for some instances.

And there has been no better proof than the ‘stamp pad’ activities undertaken by these credit rating agencies on mortgage securities which help facilitated the US housing bubble.

Of course the operational “conflict-on-interest” relationship which has been enabled by above cartel inducing regulation, has produced a business paradigm where debt organizers and issuers compensated the credit rating agencies. So US credit rating agencies served the interests of their consumers. The rest is history.