Ratings Agencies vs. the Eurozone: STRATFOR's Papic Discusses Debt Fears in Italy and Greece

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Italy has entered the spotlight in discussions of the Eurozone in recent weeks. Benzinga Radio spoke with Marko Papic, Eurasia analyst for the global intelligence company STRATFOR, on this newfound media focus as well as the crucial issue of rating agencies' power in dictating the terms of European financial policy.

Ratings agencies have demonstrated their ability to effectively nix certain policy proposals when it comes to changing the terms of debt repayment in certain Eurozone countries, most notably Italy and Greece. Debt rollover models proposed by the French have been rejected in favor of the German bond swap models, largely due to statements by ratings agencies. Papic:

"[The Germans] seem to have the upper hand right now over France. The ratings agencies essentially prompted this because they said ... even the French 'lenient' model would constitute a default."

This phenomenon of targeted agency statements, which increasingly are playing the role of threats, raises the question of whether governments - in Europe and elsewhere - will continue to make themselves beholden to the ratings assigned to their bonds. Papic discusses the fundamental conflict between ratings agencies and governments, which essentially amounts to fiscal sovereignty:

"States guard their banking systems very jealously because banking systems are considered a tool, a part of the state. It's very important ... and that creates and lubricates a more state-driven capitalist industrial system."

Have ratings agencies been relegated to irrelevance?

"I would argue that they have, simply because of the moves that the Eurozone governments are doing. They are not following the ratings of the ratings agencies, so if Greece is currently a junk-rated bond it doesn't really matter because the Eurozone is still standing by it and is providing this funding. If you are an investor, the question is why are you taking your cues from the ratings agencies? ... And investors still do. But if push comes to shove, even Portugal will get a second bailout. So this brings up the question of,'what utility do the ratings agencies have? And the ratings agencies will tell you ... why are they being blamed for a) just being a messenger, and b) why does anybody care that much if the Europeans are just going to do whatever they can?

At the end of the day, if you're an investor and a bond gets downgraded, that might [actually] be a buying opportunity because you know the Eurozone is going to step in and rescue it.

There is much more to this discussion; be sure to check out the audio in its entirety below.


 

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