Wednesday, 9 March 2011


Yup, you guessed it. This is the sequel to this post, a propos  the latest three-notch downgrade of Greek debt by Moody's.

This news initially moved Greek bond yield spreads wider, as some dumb money will react in a knee-jerk fashion to anything that sounds like bad news and some clever clogs make excellent returns on this idiocy, as well they should. If that's all there is to it, spreads should come back down very shortly as there is no incremental information in the Moody's assessment. Greece is too closely watched by now. In fact, today's debt auction returned yields only fractionally higher than the last one, well within reason if you ask me, and the Euro was up. The real fundamental reason for our bond yields going up is that we've missed our revenue targets again, despite twice adjusting them downward in the face of a steeper-than expected GDP fall..

Certainly the implications of a Moody's downgrade (our current credit rating implies that we have a 20% chance of defaulting in the next 5 years) are much more optimistic than the markets' implied probability of ca 59% (source is this CMA report, which is slightly dated, but I'm not paying for an update!). In fact, they are more optimistic than the market was in Feb 2010 - pre-bailout! If credit rating agencies had any credibility, the Moody's announcement would tighten, not widen our spreads. Cue trivia item: in Russian, "Moody's" sounds a bit like the word for "bollocks".

Mind you, on the basis of this statement by S&P, it appears to me that the credit rating agencies have the same probability-adjusted haircut in mind for our bondholders as the markets do, but tend to interpret the data in favour of bigger haircuts with smaller probability. I would expect credit rating agencies to be biased in this way, as an abundance of low-probability, high-impact default risks helps generate demand for their services. Or perhaps I'm giving them too much credit and they just don't know what they are doing.

Now I don't envy our Finance Minister. He has to lie, score cheap points for internal YOMAMA-nomic consumption and look macho while doing it. And that's assuming he's a straight guy and our Finance Ministry genuinely looks after the people's best interests. It's a bum deal (like the one I offered Yorgo here). If I were in his shoes and had to peddle the same bullshit as he does, here's what I would have said:
A: Moody's have lagged the market's implied default probability for Greece throughout the current turmoil and their two-notch downgrade only reflects their need to be taken seriously by the markets; I wish them well but am unconcerned by their latest guesswork on the chances of Greece defaulting. As things stand, I think markets have finally caught up with our fiscal situation in March 2010 and Moody's are about a year behind them.  Let me tell you what they will all be catching up with for the rest of the year...
And this is what he actually said (emphasis mine):

The rating downgrade announced by Moody’s today is completely unjustified as it does not reflect an objective and balanced assessment of the conditions Greece is presently facing. Furthermore, its timing and the multi-notch nature of the downgrade are incomprehensible and raise a number of questions. 
[…] The arguments made can in no way be justified by the additional information available since Moody’s last downgrade in June 2010 and the progress achieved since.   
[…] Ultimately, Moody’s downgrading of Greece’s debt reveals more about the misaligned incentives and the lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy. Having completely missed the build-up of risk that led to the global financial crisis in 2008, the rating agencies are now competing with each other to be the first to identify risks that will lead to the next crisis.  At a time when the global economy is fragile and market sentiment is sensitive, unbalanced and unjustified rating decisions such as Moody’s today can initiate damaging self-fulfilling prophecies and certainly strengthen the arguments for tighter regulation of the rating agencies themselves.
You see the man knows what we also know. But he reverts to the old mantra of evil specuLOLtoring and calling for regulation of the CRAs. Don't get me wrong, the CRAs have severe faults and getting their ratings the hell out of regulatory capital requirements is, for instance, a hugely important agenda. But threatening to tell our mum every time they downgrade us to WAY above where our credit rating should be makes Greece look ridiculous.

Why does he do that? Because he can get away with it. Dagong, the Chinese credit rating agency, has long held that Western CRAs are too soft on Greek debt and given us the same rating as Nigeria. Did he complain? Did he hell. He kissed the dainty toes of the Chinese. As well he should because they were buying our highly speculative bonds.

Please Mr. Papaconstantinou. We only have a few months to go now. Try not to tarnish the reputation of the Greek people any further with these tactices.

In the age of the internet, it takes literally seconds to find this old statement by the head of Greece's public debt management agency (the guy actually in charge of selling our debt), which welcomed a single-notch downgrade by Moody's in the face of market expectations of a double-notch downgrade. No agenda back then, no specuLOLtoring. Just good old Moody's refusing to follow the pack and giving us a break, despite people calling their rating 'ridiculously' high. Three months later we were of course bailed out, so Moody's had obviously missed a number of tricks. Strange, by the way, how statements are now made by the finance minister and not the head of the PDMA. It's politics, not trading.

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