S&P's Shocking Error: Mistakenly Announces French Downgrade

Yesterday, credit ratings agency Standard & Poor's accidentally sent out a message saying that it was downgrading France's AAA rating. In a statement, the firm said that "As a result of a technical error, a message was automatically disseminated today to some subscribers of S&P's Global Credit Portal suggesting that France's credit rating had been changed." S&P added, "This is not the case: the ratings on Republic of France remain 'AAA/A-1+' with a stable outlook and this incident is not related to any ratings surveillance activity. We are investigating the cause of the error." The mistake, which stood for an hour and a half, may have contributed to French bond yields hitting record spreads over German bunds on Thursday. Understandably, France is outraged over the error. French Finance Minister Francois Baroin called it a "rather shocking rumor of information that has no foundation," and said "We won't let any negative message go." By any measure, this is a rather baffling mistake, and opens up numerous questions. S&P, and the other two major credit ratings agencies Moody's and Fitch, are at the center of the current sovereign debt crisis in Europe and their influence on markets is substantial. When S&P downgraded the U.S. credit rating in August, it coincided with a cascading stock market and caused a political uproar. The agency holds similar power over other countries, and given what is going on in Europe, the EU countries are particularly sensitive to downgrades. France and Germany's AAA ratings are literally holding the EU together at this point. The two countries' AAA credit ratings are what is backing the AAA rated EFSF bailout fund which is designed to contain the region's sovereign debt crisis. The EFSF issues its own debt in the form of bonds, in order to leverage the firepower of the fund which is designed to bail out debt-stricken EU countries and banks. If France's credit rating gets downgraded, so too will the rating of the EFSF, which could substantially threaten its effectiveness. What makes this error on the part of S&P so incredibly frustrating is the fact that this institution, frankly, has been totally discredited due to its enormous failure in rating mortgage debt leading up to the 2008 collapse. Collectively, the ratings agencies absolutely failed global investors, and subsequently the entire world due to the consequences of their shoddy work, when they slapped AAA ratings on bonds composed of toxic mortgages. Yet, in many ways, the global financial system is still beholden to S&P, Moody's and Fitch, just as it is to Bank of America

, Citigroup

and the rest of the "too big to fail" banks. S&P's latest error, needless to say, is not very reassuring. There is another important question in all of this, which is how could S&P mistakenly have sent this note out to some of its clients if there is absolutely no truth to it? While it is true that S&P doesn't even have France's credit rating under surveillance, which would normally precipitate a downgrade, the market has been speculating about the country's AAA rating for sometime and Moody's is considering putting the rating on "notice." A downgrade in the coming months would not be that surprising and the market is already treating France's sovereign debt as less than AAA paper. Some analysts are taking a "where there is smoke their is fire" attitude towards yesterday's "error." "I can't remember a situation where an agency released a rating movement in error, and no doubt there will be many people who believe that there is no smoke without fire and that this cannot have happened unless S&P were preparing the ground for a downgrade," Gary Jenkins, an analyst with Evolution Securities, said Friday. Given the tense situation in global financial markets, and the accompanying volatility, these types of mistakes are really inexcusable - and quite bizarre. In light of the justifiably tarnished reputations of the ratings agencies, which unfortunately have not exactly mitigated their considerable market influence, some responsibility and a higher level of competence seems to be in order.