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S&P Tells It Like It Is in Europe

Posted by: Andy Reinhardt on December 6, 2011


In some ways it wasn’t surprising when Standard & Poor’s warned late on Dec. 5 that it was putting 15 of 17 countries using the euro on negative credit watch. The euro zone members could see their ratings lowered by one or two notches within 90 days, pending the outcome of a summit of European leaders on Dec. 8 and 9. Amid the ongoing European sovereign debt crisis and an earlier warning that France could lose its coveted AAA status, S&P’s move seemed prudent and defensible—if not overdue.

More surprising is that Germany was among the countries put on notice—not due to a lack of fiscal rectitude but for its exposure to less solvent euro zone members such as Greece and Portugal. Yet investors had already tipped at this possibility in their lukewarm reception towards a €6 billion German bond sale on Nov. 23. Even Europe’s gold standard is now tarnished.

Market reaction to the downgrade threat wasn’t too dire. The Euro Stoxx 50 index was down just a half-percentage point and major European bourses closed anywhere from slightly up to the DAX’s 1.27 percent fall, the worst of the bunch. This despite the fact that S&P issued an additional statement on Dec. 6 cautioning that if any of the euro zone members are downgraded, the European Financial Stability Facility rescue fund also could lose its AAA status.

Among critics, there was an unmistakable sense that S&P—which came under heavy criticism for not spotting the U.S. mortgage crisis earlier—had taken what amounted to a political stance. In an article called “S&P Jumps Into Politics Again With EU Warning,” Bloomberg News reported today that observers ranging from bondholders to politicians questioned the timing and motives behind the downgrade threat.

The move to tie ratings to the outcome of the summit drew criticism from European Central Bank Governing Council member Ewald Nowotny of Austria, who said today at a conference in Vienna that S&P was “politically motivated” with its announcement. “The timing and the scope of this warning has a clearly political context—a rating agency has entered the political arena,” he said.

Nowotny was echoed by European Central Bank governing council member Christian Noyer, who accused S&P of basing its judgment more on political factors and less on fundamentals. “The rating agencies fueled the crisis in 2008 and we can question whether they’re not doing the same thing in the current crisis,” Noyer said at a conference in Paris.

Others were more sanguine. German Finance Minister Wolfgang Schaeuble said on Dec. 6 that the S&P warning provided the “best encouragement” to drive leaders toward a solution at the Brussels EU summit. “The truth is that markets in the whole world right now don’t trust the euro area at all” Schaeuble said today in Vienna, as quoted by Bloomberg News. S&P’s statement, he said, will prompt European leaders “to do what we’ve promised, namely to take the necessary decisions step-by-step and to win back the confidence of global investors.”

Outsiders also praised the move as a necessary dose of realism. Ambrose Evans-Pritchard, international business editor and blogger for the London-based Telegraph, stated simply, “Standard & Poor’s is of course right,” adding:

It was well-timed to drop this bombshell on Monday night after the Merkozy fudge (though S&P made the decision earlier), since the duumvirate yet again failed to offer any meaningful way out of the impasse.

The most crucial issue, in S&P’s view, is that European leaders fearful of bond vigilantes are relying too much on austerity and not enough on stimulus to address their economic woes. Coupled with a simultaneous shift to higher capital ratio requirements for European banks, the across-the-board tightening is setting off a new credit crunch and recession.

In an FAQ released along with the credit watch notification, S&P put it directly:

As the European economy slows, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand shrinks in line with citizens’ concerns about job security and disposable incomes, eroding the revenue side of national budgets.

This is a problem that could also surface outside the euro zone, in Britain and even in the U.S., where the budget deficit is exacerbated by poisonous politics. Europe may have brought some of the pain upon itself by dithering and denying—but nobody else can afford to be smug that they’re immune from the same fate.

The attached video of Philippe D’Arvisenet, global chief economist at BNP Paribas, lends further insight to the issue.

Photo by Sean Gallup/Getty Images

Reader Comments

Timothy Gawne

December 6, 2011 2:58 PM

Excuse me. "Tells it like it is?"

Yes, this article did discuss some of the critics of S&P - but still, you are far too kind.

GIven S&P's track record, it should have ZERO credibility. Not a little, but ZERO.

S&P gave AAA ratings to: Enron, toxic mortgages, MF associates, etc. They then downgraded US debt - even though it is physically impossible for a nation that issues its own currency to default - and wonder of wonders there are reports that some insider bet a billion dollars at 10-to-1 odds that this would happen just weeks beforehand, and walked off with a cool 9 billion dollar profit. Nice work if you can get it - or if you know the right people.

Bottom line: S&P is not in the business of making objective evaluations of risk. S&P is in the business of giving AAA ratings to toxic paper for a fat fee, and threatening to downgrade creditworthy institutions to game the system.

david russell

December 7, 2011 10:25 AM

Mr. Gawne: People change. Sometimes they learn lessons from past mistakes. Why not address the issue at hand, to wit is the S&P current warning legitimate (accurate? reasonable?)? It seems clear that it is, and that it not only reflects a lesson learned from past mistakes by S&P but also demonstrates considerable courage on their part.

brickina wall

December 7, 2011 11:41 AM

@ Timothy Gawne.
Three thumbs up for your comment above.

There does seem to be a sense within the US that companies (in this case S&P) and public officials (Timothy Geithner et al.) are oblivious to the damage that they are responsible for.
In broadly geo-political terms the US economic system managed to get surprised by an on-coming freight train that set off a chain-reaction that is now threatening the European economic system. Yet somehow the US keeps an imminently straight face while telling Europe to get its house in order.
Furthermore the challenges to Europe have forced the Union to make design significant structural reforms which will either make the Euro area much stronger or break it up. Both solutions I believe are better that the current half-hearted efforts at integration.
So while Europe tackles the bull by the horns, the US prints several tons of money to appease the bear and sweeps the entire mess under a proverbial carpet. And then has the audacity to sit on the sidelines and spew advice!
Thanks for the soapbox.

Gunter Beyer

December 7, 2011 6:10 PM

I agree with Mr Gawne, the S&P needs to be investigated, and prove it has no ulterior motive after its shocking record withj toxic companies. I am sorry, but as a journalist myself, I sense the S&P right now is in the business of what the Media is often accused of -- sensationalism. I sense the S&P is rushing to judgement (by the way, no other rating agenct has been as quick with its assessments) to garner headlines and the free publicity that goes with it to grow its "stature" and business. Bloomberg is giving the S&P what it seeks -- free publicity. I rest my case!


December 8, 2011 5:06 AM

Mr. Gawne - your short note has so many errors, it is difficult to decide where to begin.. but I will try. Pls try to keep up

a) it does not matter what you think of S&P's credibility. What matters is that the markets pay attention to what S&P thinks.

b) Rating agencies are not detectives or forensic accountants. They assign ratings based on information provided by the companies, which is taken at face value. Enron committed criminal fraud by mis-stating its finances. Which is why Skillings of Enron is in jail. and no one from S&P was charged. capische?

c) every country issues its own currency. the US is not unique in that. While not impossible, it is difficult for a country * whose debts are primarily in its own currency * to default.

d) pls stop airing baseless rumours. there are no instruments that allow you to place 10-1 bets on the US's rating. I doubt casinos in Vegas allow you to play that game either...

e) bottom line, S&P is a business. period. they are paid to give opinions. the market pays if they find value in such opinions. You are not forced to pay attention to them...

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Financial markets are on the edge as investors await a solution to the European debt crisis. This blog examines the banks that hold billions of euros worth of Greek, Italian, and other sovereign debt; the governments that must pay off or refinance that debt; and the implications for the worldwide financial system if they can't.

Analyses or commentary in this blog are the views of the author and or commentators, and do not necessarily reflect the views of Bloomberg News.

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