The rating agencies are cranking up the pressure on Europe’s policymakers. Standard & Poor’s put the ratings of 15 eurozone sovereigns — including triple-A rated countries like Germany and the Netherlands — on CreditWatch with negative implications on Monday. The agency reckons the systemic stresses in the eurozone have risen to a point where they put downward pressure on the credit standing of the eurozone as a whole.
That has implications beyond the sovereigns. The European Financial Stability Facility’s triple-A status is also under threat. S&P said that it may downgrade the bail-out fund by one to two notches if the agency lowers the triple-A ratings of its guarantor members.
A downgrade of the group of 15 would leave just nine sovereigns rated triple-A by S&P. Thinking the unthinkable would become commonplace. KfW’s seal of quality could suffer from a Germany downgrade. Even the World Bank’s rating could be threatened as the triple-A part of its shareholder base shrinks.
The reality is that if S&P does downgrade those sovereigns, investors will be left with little choice but to ignore the top rating altogether – in much the same way that the downgrade of the United States this summer was largely ignored. It would be a move with little meaning, other than shifting the effective top rating down a notch. There won’t be enough triple-A rated paper out there to satisfy investor demand. Many buyers who previously would not touch anything below the top rating will quietly decide that they can.
The agencies are in a bind – all the more so because they are still smarting from the beating they endured when some triple-A mortgage-backed debt started to behave remarkably like junk. Something has obviously changed in the sovereign debt world; the agencies are trying to reflect it.
Cutting sovereign ratings across the board in the eurozone would have one effect, of course: it would put paid to any remaining notion of a risk-free asset. The morbid joke among investors this year has been that risk-free rate has been replaced by rate-free risk. They can hardly complain when ratings catch up with their sense of humour.