European Debt: Are the Rating Agencies Making Good Use of This Crisis?

Never let a good crisis go to waste, it is said. One senses that the credit rating agencies may be viewing the European debt crisis as an opportunity. They've questioned whether the "voluntary" or even voluntary reinvestment by banks and other holders of Greek debt in new long term bonds as a way of sharing losses with northern European taxpayers isn't a default. After all, it delays recovery of a good portion of the principal the bondholders would otherwise expect, and Creece's long term creditworthiness isn't self-evidently golden.

Today, Moody's downgraded Portugal's debt to junk status, finding that its chances of needing a second bailout are rising. This isn't a derivatives market domino effect. It results from an analytical process.

The credit rating agencies lost a lot of credibility during the 2007-08 financial crisis, amid allegations ranging from stupidity to blindness to conflict of interest from the fact that they are paid by issuers of securities. They've been dragged into court by angry investors, thus far surviving but hardly covering themselves with glory.

Reform of the regulation of credit rating agencies remains a work in progress. Particularly thorny are the problems of conflicts of interest and regulatory reliance on credit ratings. Resolution of these issues appears to be proceeding with all deliberate speed.

In the meantime, the agencies themselves may have figured out that demonstrating a little backbone would probably do them more good than squabbling in court or lobbying in Washington. Integrity is the scarcest thing in the financial markets--far scarcer than inside information, judging from recent government cases. Integrity's very scarcity makes it extremely valuable. The credit rating agencies' best chance for survival would come from providing accurate information and candid opinions in a timely manner. They would make themselves relevant and valuable to investors. And, at a time when virtually all high ranking governmental officials in Europe want to put new clothes on the sovereign's debt and kick the can farther down the road, the rating agencies would help move the crisis toward true resolution.