By Michael Northcott Monday, 12 November 2012

Italian prosecutors to sue S&P and Fitch credit ratings agencies

With political unrest in the PIIGS countries at a particularly high pitch in recent weeks, it is perhaps no surprise that ratings agencies and their 'downgrades' are under fire, again.

Magistrates in southern Italy have called for seven executives at Standard & Poor’s and Fitch ratings agencies to be tried over downgrades that were made to Italy’s sovereign debt rating last year. In tough times it’s natural that people are looking for a scapegoat for all the turmoil, but this looks like yet another example of the absurd finger-pointing in the Italian legal system. Italian tax police have said the trials would be part of a wider market-rigging probe concerning the downgrades. This obviously leaves open the suggestion that Italy’s credit rating could have been downgraded unfairly, or leaked to the market early as fuel for advantageous trading. Sneaky. 

The prosecutors in the southern Italian town of Trani had been investigating two staff at rival ratings agency Moody’s, but police say this particular line of enquiry has now been dropped. The magistrates are also investigating the ratings agencies for alleged abuse of privileged information concerning all of the ratings cuts that have been applied to Italy since early 2011. But Standard & Poor’s has been quick to reject the whole shebang. It said in a statement: ‘These claims are entirely baseless and without any merit as our role is to publish independent opinions about creditworthiness according to our public and transparent methodologies, which we apply consistently around the world.’ A firm riposte. But probably not enough to shut up the magistrates.

They think that S&P’s and Fitch’s reports on sovereign debt and the wider Italian banking system were leaked during market hours. They blame this for some of the more frightening market plunges the country has seen over the last 18 months. Furthermore, critics of ratings agencies will point to the fact that debt downgrades could be seen as a self-fulfilling prophesy: if you downgrade a country, markets plunge, investment slows down further, and economic growth falls further out of reach. But is that really an argument not to downgrade?

Meanwhile, the Greek debt crisis trundles on in fine form. Today it emerged that its international lenders cannot agree on how best to deal with Greece’s debts. The country narrowly approved an extremely tough 2013 budget just last week containing more cuts, but lenders cannot agree on how to make the debts sustainable. The next tranche of loans/bailout cash has been held up because Athens did not manage to keep up with agreed reforms and budget cuts. Greece is perilously close to being unable to pay the wages of public sector workers. 

All in all, the PIIGS countries continue to have a torrid time: spiralling debts, collapsing banks and stringent budget cuts programmes are an understandable recipe for anger. And markets frightened by credit rating downgrades are the last thing any ailing economy needs…

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