Mario Draghi, Governor of the European Central Bank and Chairman of the Financial Stability Board.
Last Friday the Fitch rating agency downgraded Italy’s long term creditworthiness to “BBB+” from “A-“, with negative outlook. The American firm did that with a delay of many days after the Italian elections, citing as reason the unconventional results of the vote. It is important to note however that capital markets themselves, after the initial negative reaction to the Italian supposed political stalemate, had already regained their sangfroid and had positive assessed Italy’s long term credibility, with the risk premiums restored to more or less their previous levels. It was exactly at that point in time where Fitch came out with its own assessment, as if it wanted to correct the markets and bring about again some unsubstantiated fears over the political life of the 8th larger economy in the world!
Given that the three American rating agencies are confronted with mounting problems in Europe, over the legality, quality, transparency and the non-biased character of their ratings, with a pending court case in the Italian courts, this Fitch announcement had a revengeful essence. On top of that the European Parliament last January adopted a regulation posing additional problems to the three American rating agencies operations in Europe. It must be reminded that there are already in place limitations to the functioning of Fitch, S&P and Moody’s under previously adopted EU legislation.
Agencies under pressure in Europe
According to the recently adopted text by the European Parliament, “This regulation introduces a common regulatory approach in order to enhance the integrity, transparency, responsibility, good governance and independence of credit rating activities, contributing to the quality of credit ratings issued in the Union, thereby contributing to the smooth functioning of the internal market while achieving a high level of consumer and investor protection. It lays down conditions for the issuing of credit ratings and rules on the organisation and conduct of credit rating agencies, including their shareholders and members, to promote credit rating agencies’ independence, the avoidance of conflicts of interest and the enhancement of consumer and investor protection”.
The European Parliament has also confined the over-reliance on credit ratings by Eurozone financial institutions, by stating that financial organisations of any kind “shall make their own credit risk assessment and shall not solely or mechanistically rely on credit ratings for assessing the creditworthiness of an entity or financial instrument”. By the same regulation the EU Parliament has set limits to the use of the three rating agencies’ services by the European authorities, ordering that the “European Systemic Risk Board (ESRB) established by Regulation (EU) No 1092/2010 of the European Parliament and of the Council…shall not refer to credit ratings in its warnings and recommendations where such references have the potential to trigger mechanistic reliance on credit ratings”.
In short, Europe is gradually but surely shutting the door to the three American ‘rating Musketeers’. It is difficult to know how much money Fitch, S&P and Moody’s are about to lose from Europe, but it must be a lot.
Italy is self-sustainable
Returning to the subject matter of this affair, that is the creditworthiness of Italy, one has to take seriously into account the very positive and relevant comments made by Mario Draghi, the governor of the European Central Bank, during the Press conference after last Thursday’s ECB’s governing Council. While answering a reporter’s question, about “the uncertainties after the last elections and the dysfunctional Italian political system”, the governor said “as you have seen, markets – after some excitement immediately after the elections – have now reverted back more or less to how they were before. I think markets understand that we live in democracies… All in all, markets were less impressed than politicians and you. You also have to consider that much of the fiscal adjustment Italy went through will continue on automatic pilot. And also, if you consider this year, the net supply of government bonds is considerably less than last year – if I’m not mistaken it’s about €30 billion. So it’s very much a matter of rolling it over. All this is happening in a general environment where we have many signs that confidence is returning to the financial markets of the euro area”.
An ‘export machine’
The ECB governor however forgot or his position did not permit to say that Italy is a totally different case than Greece, Portugal and Spain. Apart from the fact that it is the 8th largest economy of the wold, Italy has a particularly strong business backbone of small and medium outward looking enterprises. Those enterprises offer an array of products and services as Germany and France put together. That is why those Italian enterprises managed to export an astonishing wealth of products of €365 billion during the eleven month period of January-November 2012. This was 5% more than during the same period of 2011. As a result Italy can cover its imports of goods with the value of its exports. Apart from that the country runs every year a hugely positive external balance in the services sector, based in the unbelievable dynamism of its tourism and transport.
Taking all those economic facts into account, it is not at all surprising that the country has managed to fare quite successfully through the unreliable, unstable and short-sighted system of its political parties. Over the past thirty years the average life span of any Italian government was around 11 months. That is why the country has developed a civil service, mainly in the law enforcement and judicial sectors, which are a paradigm of efficacy and robustness. In this way political uncertainty is nothing new to Italy and its economy has traditionally come to terms with that. It is not by chance that Italy covers with its own savings and internal capital accumulation, the largest part of the refinancing needs of the country’s large sovereign debt.
As a result no rating agencies neither hits below the zone by “journalists” can turn the Italian debt into an opportunity for the American money sharks, to profiteer and make paper wealth out other people’s sweat. Italy and Italians are not easy targets and can strike back even in the heart of New York. Why not? Is the other side any better?
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