Europe turns on the ratings agencies

What is the best way to comment on the financial health of a country? The two bodies who seek to do this are at loggerheads after the FT revealed an EU plan to stop credit rating agencies from offering their view mid bailout talks. This plan was first mooted by the new IMF head. Investors will be the arbiters of who is right so we will look at investor sentiment towards Moody’s (NYSE:MCO) and Fimalac EPA:FIM .

The inability of the European Union, the ECB and the IMF to find an acceptable solution for Greece was made even harder last week. When it looked as if “the French plan” of rolling short term Greek debt over to longer term maturities, ratings agencies surprised everyone by saying they would still classify this as a “default”. Why did this matter? Anyone who has taken out insurance against a Greek default benefitted from this opinion. But, contrary to popular perception, it was not that important since credit derivative related insurance amounts to around USD 5 billion of trades. This is tiny relative to the size of the Greek government bond market which is almost 100 times as big. Still, it showed that a public company in the US (Moody’s for instance) was not going to waive its criteria and accept a form of action that the EU felt was a fait accompli.

Then, Moody’s downgraded Portugal’s debt rating which was another blow to the EU. On balance, investors have been applauding Moody’s (MCO) post credit crisis re-launch. Its shares are up to where they were before Lehman fell and this run has been supported by institution investors, whose shares are borrowable, adding to their holdings. Such funds own 24% of Moody’s today and this was a high as 29% in early May.

Short sellers were highly critical of Moody’s role in the mortgage back securitization debacle and remain somewhat negative. The short interest is 9% of all shares but was up to 11% in April and was over 20% pre crisis.

Demand to borrow the owners of Fitch ratings (Fimalac EPA:FIM) is low but funds who lend are selling their shares – so mixed sentiment here. Looking at the investor sentiment in McGraw Hill, which owns S&P, is fruitless in that their business is so well diversified that it makes little difference.

I will leave others to pass judgment on this comment by the EU’s Michel Barnier, “they (member states) benefit from the solidarity of its members…that is why we should ask ourselves….whether it is appropriate to allow sovereign ratings on countries which are subject to an internationally agreed programme.” http://www.ft.com/cms/s/0/63e97e8e-abc2-11e0-8a64-00144feabdc0.html#axzz1RseniAOW Suffice to say that investors will and should keep their own counsel when it comes to who to believe regarding the solvency of countries or companies.