Politics and Ratings. The Empire Strikes Again.


DBRS, a Canadian rating agency, has recently downgraded Italy to BBB, removing the country’s last ‘A’. In the meantime, Moody’s has just been fined, yet again, this time US$ 864 million for “inflated ratings to risky mortgage investments in the years leading up to the financial crisis”. Last year, S&P paid US$ 1.5 billion in settlement. There is no need to insist on how rating agencies operate and how credible their ratings (sorry, that is opinions!) are. There are even Oscar-winning movies on the subject, not to mention numerous court cases.

This blog discusses how  ratings can become a tool beyond just distortion or deception. In fact, they have de facto become a tool for doing politics.

It is now clear how in 2011 rating agencies, S&P in particular, have manipulated data in order to help oust the Berlusconi government. This was accomplished by increasing artificially the spread between the Italian and German bonds to ridiculously high levels. A rapid sequence of downgrades did the job. Italy, which has the world’s fifth largest manufacturing industry, the third largest gold reserves and 70% of the World’s art heritage – worth many times the GDP of many a state – was suddenly on the verge of collapse. Yes, collapse! Overnight. The government had to go in (literally!) 24 hours in order to avert disaster. All this started when Italy, a country having the lowest private debt in the EU, one of the few countries whose government receives more money than it spends, and one of the very few which didn’t use public money to prop up its banks, was gently offered a 100 Euro billion ‘bailout’ at the Nice G8 summit in 2011. Italy refused to be bailed out because it didn’t need to. T. Geithner’s book Stress Test (2014) mentions this clearly: “…a few European officials approached us with a scheme to try to force Italian Prime Minister Silvio Berlusconi out of power…”. The media carefully concealed this. But what happened then? When you refuse protection, they’ll go after you. And this is why the rating agencies were asked to get the job done.

In a recent article, magistrate Michele Ruggiero said:

“In 2011 Italy was doing better than all the other European states, but Standard & Poor’s’, lies and falsification of information provided to investors, questioned the prestige, the creditworthiness of a sovereign country like Italy.” The punishing sequence of downgrades – the last of which was from A to BBB+ – that followed “lacked any macroeconomic justification”. In fact, in 2012 Italy, for example, had, according to the EU Commission, the best long-term fiscal sustainability, thanks to its healthcare and pension reforms. The latest EU report claims that this is still the case. Does all this add up to just two notches above junk?:


(BTW, see where countries like Belgium, Luxembourg or Finland are on the chart!)

But this appears to be irrelevant. The fact that Italy has the lowest total debt (=Explicit debt + Implicit debt) or that it has the highest Private Wealth/GDP ratio of 5.75 in the EU (France and UK, for example have 5.19 and 4.7 respectively) are of no importance. This means that Italians hold 2.15 US$ Trillion X 5.75 = 12.3 US$ trillion. Surely, a great way to ‘transfer this wealth’ (seize is the word) is to downgrade the country to a point at which it needs to be bailed out and place it into the competent hands of the european Troika which would administer things much like it did in Greece. This is equivalent to a colonisation which Mr. Berlusconi has effectively avoided. But he has been punished and removed from office.

Since then, Italy has had four governments which have not been elected in a democratic election: Monti, Letta, Renzi and Gentiloni. The Monti government has been appointed directly by the Troika. But the people of Italy would like to vote and there is talk of elections to be held in April. For some reason, this appears to collide with the plans and interests of somebody. Below is an extract of DBRS’s motivation behind their recent downgrade. Note how much of the report is dedicated not to the analysis of the macroeconomic situation of Italy but to politics, electoral laws, referendums, and speaking explicitly of the ‘risk of elections‘:

“The new interim government, although supported to some extent by the same majority as the Renzi government, may have less room to make progress with growth-enhancing measures, as it was formed with the main aim of facilitating parliamentary discussion on the electoral law before political elections scheduled to be held in 2018. Furthermore, the risk of an early election remains, especially after a decision is made by the Constitutional Court on the electoral law, expected in late January 2017. This decision could affect the duration of Prime Minister Gentiloni’s cabinet. Political parties could immediately put more pressure for snap elections in the first half of 2017, using the electoral law produced by the decision of the Court. This pressure would be expected to capitalise on the result obtained in the referendum in December 2016.

However, there is also a lack of clarity over the timing of elections. DBRS considers that the next election is unlikely to be held before Autumn 2017, as the parliamentary discussions on the electoral law are likely to take time. DBRS also considers that the next electoral law is likely to have a higher proportional characteristic, increasing the chances of having a coalition government of mainstream parties and lowering the electoral chances of Euro-sceptic parties. Nevertheless, support for the opposition parties could increase if economic conditions were to not improve, especially for the young and the long-term unemployed.”

Indeed, having people vote is risky because one cannot guarantee the outcome. Imagine that Italians elect a less EU-friendly government. After the Brexit, the fact that M. Le Pen may start a new political earthquake in France, an anti-EU vote in Italy would be disastrous hence it must be prevented. How? You downgrade the country to levels of junk and have the Troika step in. The mechanism is now clearly known and has been tested successfully in 2011. It is not difficult to imagine another downgrade spree against Italy in the coming months, especially close to the upcoming elections. That’s if we get to vote.

So it is not only ‘opinions’. It is political opinions too. In the distant past, rating agencies rated companies. Then they started to rate derivatives (with little luck). Now they’re into politics and removing governments from office. What will it be tomorrow?

“If you are going to sin, sin against God, not the bureaucrats. God will forgive you but the bureaucrats won’t.”

Hyman G. Rickover




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