Today's Coming Crisis Movie

Wednesday, July 6, 2011

Europe declares war on rating agencies after "destabilising" Portugal downgrade

A chorus of policy-makers from Europe and across the world have denounced Moody's drastic downgrade of Portuguese debt as an act of financial vandalism, accusing the "Anglo-Saxon" rating agencies of driving states into bankruptcy and destabilising the global system.

Wolfgang Schauble, German finance minister, said there was no justification for the four-notch downgrade or for warnings that Portugal might need a second bail-out. "We must break the oligopoly of the rating agencies," he said.

Heiner Flassbeck, director of the UN Office for World Trade and Development, said the agencies should be "dissolved" before they can do any more damage, or at least banned from rating countries.

Moody's downgrade late on Tuesday set off immediate contagion to Ireland, with dangerous ripple effects across southern Europe. Yields on Irish two-year bonds surged above 15pc of the first time. Italian borrowing costs reached levels not seen since the aftermath of the Lehman crisis in late 2008. Yields on Spain's 10-year bonds jumped 12 basis points to 5.59pc.

The renewed jitters chilled the torrid summer rally on global bourses. The FTSE 100 slipped 21 points to 6,002, while Milan fell 2.4pc. A quarter-point rate rise in China added to the mood of caution, capping commodity gains.

David Owen, of Jefferies Fixed Income, said concerns are growing the crisis could spread to bigger economies as growth falters across Europe's southern arc. "The risk of cross-over into Spain and Italy is very serious. The fear is what will happen if Spanish 10-year yields rise above 5.7pc and stay there for a few weeks. Spain also has €2.5 trillion of private sector debt, and a rise in rates risks pushing the country into recession." (read more)