No sooner had Merkel and Sarkozy put the finishing touches on the latest bailout rumors than Standard & Poor’s was threatening to downgrade the debt of 15 of the 17 euroland nations. Recall that as the week began, France and Germany were talking up the latest supposed solution to the debt crisis. Bigger and better than their last supposed solution, it drew a rave from the always-discerning Tim Geithner, who pulled out all the stops in making much ado about nothing. “The eyes of the world are very much on Europe now,” he told reporters in Berlin, adding that he was “very encouraged by developments in Europe in the past two weeks, including reform commitments in Italy, Spain and Greece.”
Nothing like a little more austerity to resuscitate the economies of Europe’s deadbeats, right? The prospect seems to have swayed no one at Standard & Poor’s, which is out to show the world that it matters after having missed a hundred signs a few years ago that the banking system was in imminent danger of collapse. The ratings agency has been doing its vengeful best to atone for the oversight, distancing itself from borrowers with whom it used to sleep around. The threatened downgrade would affect the long-term rating of Europe’s bailout fund, the European Financial Stability Facility. A decision reportedly is pending a review by S&P of the sovereign members’ books, and there’s a possibility that ratings could come down a couple of notches. That would put even more pressure on the ringmasters of Europe’s dog-and-pony show, including the U.S. Federal Reserve, to counterpunch with sufficient easing to offset the increase in borrowing rates that would otherwise occur.
A Mere Formality
While an S&P downgrade would be a mere formality, it would explicitly warn private capital away from public debt. Not that any such warnings are needed, since no one actually believes that there are any sovereign borrowers left, even Germany, whose debt deserves to be rated as nearly riskless. In the meantime, the widening schism between the ratings agencies and sovereign borrowers can only heighten the public’s skepticism toward the latter. In time, this skepticism will harden into cynicism, which in turn will extinguish the last vestige of credibility the central banks may still possess. All of it rests with officialdom at this point, the public having long since ceased to believe that the bankers know what they are doing.
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