ECB’s Draghi Questions Role of Ratings Companies After S&P Downgrades
“I will never comment on ratings as such, but certainly one needs to ask how important are these ratings for the marketplace overall, for investors?” Draghi said late yesterday at the European Parliament in Strasbourg. “It seems to a great extent markets have anticipated these ratings changes and priced them in. We should learn to do without ratings, or at least we should learn to assess creditworthiness” with less reliance on the ratings companies, he said.
S&P stripped France and Austria of their top ratings on Jan. 13 and cut seven other euro countries in a move that left Germany with the bloc’s only stable AAA grade. In an echo of the rally in Treasuries following S&P’s lowering of the U.S. sovereign rating in August, investors shrugged off the judgment on Europe, with France’s borrowing costs dropping at its latest debt sale.
France sold 1.895 billion euros ($2.4 billion) of one-year notes yesterday at a yield of 0.406 percent, down from 0.454 percent on Jan. 9. The Treasury sold a total of 8.59 billion euros in bills, including three and six-month paper. Yields fell on both.
While ratings are intended as an assessment of creditworthiness, instead of eroding the value of American government debt, the U.S.’s loss of its AAA grade from S&P on Aug. 5 sparked financial market turmoil that made Treasuries favorites among investors, with 10-year note yields dropping to a record low 1.97 percent on Aug. 18.
The following month the yields reached 1.67 percent; they were 1.88 percent as ofS 12:51 p.m. in Tokyo. The Chicago Board Options Exchange Volatility Index (VIX), or VIX, surged the most after the downgrade on Aug. 8 since February 2007. Crude oil fell 6.4 percent on the U.S. rating cut.
Efforts to combat the Europe’s debt crisis are falling short, S&P said. The company last night also removed the AAA grade of the European Financial Stability Facility, which is designed to fund rescue packages for Greece, Ireland and Portugal.
The decline in French borrowing costs helped European stocks gain yesterday, with the Stoxx Europe 600 Index adding 0.8 percent. The euro snapped two days of losses, rising 0.5 percent to $1.2731 as of 12:52 p.m. today in Tokyo.
Draghi nevertheless said growth prospects in the euro region are “dismal” and that the situation is “very grave.” The ECB, which last week kept its benchmark rate at a record low of 1 percent, in December cut its 2012 growth forecast for the euro area to just 0.3 percent from 1.3 percent.
The ECB’s three-year loans to banks last month helped to avoid “a major credit crunch,” Draghi said.
“We see that the key refinancing markets for banks are clogged; the interbank market is basically not functioning,” he said. “The unsecured bond market was not functioning -- completely not functioning -- until we launched this facility. We have avoided a major credit crunch, even though in some parts of the area this credit crunch” is “already on its way.”
Draghi indicated the ECB will continue to intervene in bond markets to limit yields without ramping up its purchases for fear of breaching the prohibition on monetary financing.
“The ECB, within the primary remit of price stability and within the remits of the Treaty, will do whatever it takes to assure financial stability,” he said.
Draghi urged politicians to implement budget reforms to win back investor confidence and overcome a debt crisis that has now entered its third year. The “fiscal compact” agreed to by European Union leaders on Dec. 9 was an important signal of willingness to relinquish some sovereignty and take “admittedly tame steps” toward a fiscal union, he said.
“Decisions without matching actions are not enough and due care should be taken to implement measures in the correct sequence,” Draghi said. “We need to restore confidence in sovereigns and ensure that EU firewalls are operational and well equipped with an effective and flexible mandate.”
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