At the time of writing, the Italian Senate was expected to pass on a raft of austerity measures for discussion in the Lower House as credit ratings agencies threatened to downgrade the status of the third largest eurozone economy.
While all this was happening, in a different timezone, news reports about a possible partial default in the US were being filed on the wires as the final story of the day. The major players, Moody’s, Fitch and Standard & Poor’s have all said that they will downgrade the US’s credit worthiness by one notch, from the highest triple-A bond rating to double-A.
Moody’s said the US government was running out of time to raise America’s $14.3 trillion borrowing limit and avoid a default.
A downgrade would raise interest rates on US treasury bonds, increasing the interest paid by US taxpayers. It would also push up rates for mortgages, car loans and other debts, which are linked to Treasury rates. Moody’s provided a stark assessment: “An actual default, regardless of duration, would fundamentally alter Moody’s assessment of the timeliness of future payments.”
Meanwhile, Italy’s move to intensify its austerity drive received a much-needed boost from Fitch Ratings agency, which said the measures will help stabilise the government’s finances and its credit rating.
Italian lawmakers were working to bolster the €48 billion in austerity measures that begin to take effect this year and aim to balance the budget by 2014.
Italy’s finance minister said the country was serious about its duty to reduce debt. He also said market losses in recent days were not a problem “of a single country but of the structure of Europe”.
“At this moment, we have more or less 40% of Europe under pressure,” he said.
Concerns about Italy’s high debt, dysfunctional political system and stodgy growth have focused attention on the country’s financial future.
The two issues continue to highlight the growing schism between governments, eurozone regulators, central banks and the credit ratings agencies. China, which has the luxury of its own currency to appreciate and devalue, as it sees fit, has already hinted that it might set up its own credit agency rating, claiming that ratings are not always objective.
The West argues that China plays with the renminbi’s value, negating the credibility of any such Chinese agency. But it is not only China. The EU and the European Central Bank’s outgoing president Jean Claude Trichet also lashed out at credit agencies, saying that they had fuelled mass hysteria about Portugal and Spain, at the height of the crisis. In turn, overtures were made about the possibility of setting up a ‘European Credit Agency’. Whatever the case may be, it is clear that the whole game is about credibility and perception, and the angle at which one looks at an economy from.
At the end of the day, we are in a situation where the regulators are the players and the players are also the regulators. No wonder we are in such a mess.