Bashing Rating Agencies is foolish (ls)

During the last days, politicians were keen on bashing rating agencies. Their reluctance to accept a model of a bailout with private-sector participation, their threat to react by lowering the Greek rating to (selective) default and the recent massive downgrade of Portugal has led to sharp reaction amongst policymakers.

These reactions are completely ridicolous. Policymakers desperately look for someone to blame for the current mess. In fact, rating agencies are only delivering the bad news. The myth of illiquid but principally solvent periphery states has eventually been revealed as surreal.

What bothers me most, is the idea of creating a European agency. What should be the outcome? Judgements going hand in hand with policymakers' preferences? AAA-Ratings for Greece?  If their is the slightest doubt concerning its independency - and there would be good reason for such doubts - the market just will not listen. In principle, governments could impose ratings on their debt instruments themselves. Concerning credibility, this would essentially be the same. On the other hand, a completely independent agency will basically reach the same conclusions as S&P, Moody's and Fitch. People who argue that the rating agencies are a vehicle of the United States and their perceived interest to prevent the Euro becoming a key currency are just misleaded conspiracists. To me, it's the same as thinking of 9/11 as an inside job or as regarding Goldman Sachs as the very source of all evil.

Concerning contagion effects of a Greek default, you can find very insightful research here. Based on an econometric analysis of sovereign CDS spreads the authors reach the following conclusion:

[...] the evidence suggests that contagion has become less likely today relative to the past couple of years. After a relatively long period when markets bundled EU sovereign risks together, financial markets have started to discriminate more. This means two things. First, an orderly restructuring of Greek sovereign debt is less likely to produce a disruptive “rush out of Europe” than in the past, and second, the fate of other problematic countries, such as Italy, rests, now more than ever, in their own hands.

This puts doubts on the story of dangerous contagion effects and a systemic event à la Lehman. Admittedly, I held another opinion at the beginning of the debt crisis. Amv probably loves to read this. I still feel great sympathy for the idea of leveraged buybacks which was proposed here. It's puzzling to me that this proposal doesn't find its way into the current debate.