Lost in the hubbub of Standard & Poor’s downgrading the US bond rating is news that the Italian government has the ratings agencies under criminal investigation.

The Guardian‘s John Hooper:


As stock and bond markets across the world tumbled on fears about Italy and Spain, it emerged that police acting on orders from prosecutors had raided the Milan offices of rating agencies Moody’s and Standard & Poor’s as part of continuing investigations into their role in the recent financial turmoil.


Carlo Maria Capistro – chief prosecutor of Trani, a small Adriatic port – told Reuters that his office was checking to see whether the rating agencies “respect regulations as they carry out their work”. The raids took place on Wednesday as Italy’s prime minister, Silvio Berlusconi, addressed parliament on the mounting crisis.

He and other leading Italian politicians often cite speculation as a cause of market storms that involve a run on the country’s shares or bonds. And the media habitually depicts sell-offs as attacks on Italy.

S&P, which along with other rating agencies has been strongly criticised in Europe for downgrading countries such as Greece, said in a statement it believed the Trani inquiry “has no foundation”. It added: “We shall strenuously defend our work, our reputation and that of our analysts.” Moody’s said it took “its responsibilities surrounding the dissemination of market-sensitive information very seriously”, and was co-operating with the authorities.

The Trani prosecutors began investigating Moody’s in May last year after a complaint by two consumer associations about a report from the ratings agency which said the Italian banking system was at risk from the crisis in Greece. It sparked a round of selling on the Milan bourse. It is not clear why the consumer groups took their grievances to out-of-the-way Trani, but Italian prosecutors have wide, discretionary powers to look into alleged offences brought to their attention.


Standard & Poor’s came under scrutiny in May after it threatened to downgrade Italy’s credit rating because of its huge public debt. Italy is proportionately the second most highly indebted country in the eurozone after Greece.

The inquiry has since been widened to include a report by S&P last month in which it criticised the government’s austerity measures. Those questioned by the Trani prosecutors include the president-designate of the European Central Bank, Mario Draghi; Italy’s finance minister, Giulio Tremonti, and a former prime minister, Romano Prodi.

A separate inquiry is being conducted by prosecutors in Rome into market panics in June and July. Italy’s stock market regulator, Consob, last month summoned Moody’s and S&P for meetings and urged them not to release their statements during market hours.

Elio Lanutti, president of one of the consumer groups that sparked the inquiry, said: “The three ‘sisters’ – Standard & Poor’s, Moody’s and Fitch – are an erratic danger to state sovereignty in the areas of economics and finance”.

This certainly sounds like a fishing expedition and attempt at intimidation rather than a legitimate inquiry into broken laws. But, while Italy is taking this much too far, Lanutti’s statement would get widespread agreement in the capitols of Europe. The American government’s response to the S&P downgrade is to push back against the analysis and facts used to reach it. European governments, on the other hand, are outraged by the notion of private business groups having the temerity to issue judgments on sovereign states.

Ambrose Evans-Pritchard, international business editor for The Telegraph, proclaimed last month, “Europe declares war on the rating agencies.” Soeren Kern,  senior analyst for transatlantic relations at Madrid’s Grupo de Estudios Estrategicos (Strategic Studies Group), rounded up bitter reactions from notable European leaders:

Consider, for example, the reaction of Viviane Reding, the European commissioner for justice. Reding told Germany’s Die Welt newspaper: “Europe cannot let itself be destroyed by three American private companies.” She added: “I see two possible solutions: either the G-20 states agree together to smash the cartel of American rating agencies. Or independent European and Asian rating agencies are established.”

European Commission President José Manuel Barroso accused the agencies of “mistakes,” “exaggerations,” “conflicts of interest,” and of having an anti-European “bias.” Barroso asked: “Is it normal to have only three relevant actors on such sensitive issues where there is a great possibility of conflict of interest? Is it normal that all of them come from the same country?”

Attacking the domination of the ratings sector by the Americans, Barroso continued: “It seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe. It is important that we do not allow others to take away our ability to make judgments.”

The unelected Barroso also said it was time for a European ratings agency to emerge as a counterweight to the U.S.-dominated groups: “We know that when there are oligopolies there are sometimes attempts to abuse the dominant position or market manipulation, so the more competition the better — this is our credo.”

German President Christian Wulff said it was shocking that the rating agencies continue to exercise so much power, and warned of the need for policymakers to “re-conquer the primacy of politics.” German Finance MinisterWolfgang Schaeuble said he “cannot decipher” the recent ratings downgrades of Portugal. “We need to examine the possibilities of smashing the rating agency oligopoly,” he added.

European Commissioner for Internal Market and Services Michel Barnier said something must be done to cut the “power and influence” of the American agencies. In true Eurocrat fashion, Barnier also issued a veiled threat: “I invite the agencies, which are under the control of national supervisors, to be extremely careful to fully respect EU rules. They should learn the lessons from the past.”

Greek Foreign Minister Stavros Lambrinidis criticized the behaviour of the agencies as “the wonderful madness of self-fulfilling prophecy” because it made it harder for insolvent countries like Greece and Portugal to borrow to keep afloat. Never mind the “madness” that European leaders have allowed themselves to believe they can borrow forever without ever having to pay back the debt they have accrued.

European Commissioner for Economic and Monetary Affairs Olli Rehn accused Moody’s of “so-called clairvoyance.” Greek Prime Minister George Papandreou said the ratings agencies were “seeking to shape our destiny and determine the future of our children.” As if the rating agencies accumulated the mountains of Greek debt.

Luxembourg Prime Minister Jean-Claude Juncker said the influence of American credit rating agencies was “disastrous.” The Italian chief economist of the OECD, Pier Carlo Padoan, said of the ratings agencies: “It’s like pushing someone who is on the edge of a cliff. It aggravates the crisis.”

German Foreign Minister Guido Westerwelle called for the creation of a European rival to the three agencies. “It is necessary to establish an independent European rating agency. This must be a goal that we all work on intensively,” he said.

Whether it makes sense for Europe to have its own ratings agency to break the monopoly of the American Big Three (although, as Kern notes, Fitch is majority-owned by a French firm, Fimalac) is beyond my expertise or interest. But, certainly, if there’s any value in having independent ratings agencies, it’s lost if it’s under the control of the governments it’s supposed to be rating.

Beyond that, using the power of the state to intimidate the existing agencies for daring to express an analytic view of the political processes of Italy or the EU is simply outrageous.

James Joyner is managing editor of the Atlantic Council.

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