Read the 6 paragraphs and answer the questions in 200 words:
Plans to roll over private creditors' Greek debt run into trouble
PITY the ratings agencies. During the financial crisis they were slammed for being in hock to the people they rated and for being hopelessly wrong on their structured-credit scores. Now they are being slammed for showing some backbone and for being right. On July 5th, for example, Moody's downgraded Portugal's rating to junk, prompting Jose Manuel Barroso, the head of the European Commission, to talk darkly of bias. "Our analysis is more refined and complete," he said (in a Portuguese accent).
That the view of private ratings agencies should matter so much is partly the fault of the Europeans themselves. Take the negotiations on an agreement for private creditors to roll over as much as EUR 30 billion ($43 billion) of Greek debt, to reduce the size of the country's next official bail-out. A complex proposal advanced by the French banking lobby had been seen as a basis for such an agreement.
These hopes were rocked on July 4th when Standard & Poor's (S&P), another ratings agency, said that it would probably declare Greece to be in selective default if it implemented the French rollover plan. S&P argues that any exchange or restructuring that diminishes the value of bonds would trigger default. Moody's followed up on July 5th by warning that an extension of Greek debt maturities might lead to impairments on banks' books.
Their opinions matter principally because the European Central Bank (ECB) says it will not accept Greek bonds as collateral if the agencies declare they are in default. If the ECB followed up on that threat, Greek banks could see their funding dry up (although some think Greece's central bank might even then be able to keep providing funds to its banks through a scheme known as Emergency Liquidity Assistance). Details of a rollover are still being discussed--some big banks are now talking about supporting a Greek buyback of existing debt at market prices. But the contortions have begun to make sure that a default rating would not cause chaos.
The ECB itself has been hinting that all of the main agencies (Fitch is the other biggie) would have to declare a default before it would stop accepting Greek bonds as collateral. Another line of argument is that some defaults are worse than others. Take the term "selective default", which means that only those bonds that are directly affected by a restructuring get downgraded while others can retain their ratings (and presumably be used at the ECB).
Greece may also be in default only for a matter of days or weeks. Ratings agencies are coy about how long this status might last but S&P has said that it would reassess after a "short time" and apply a new rating to Greece based on its expectation of the country's ability to service its debt. Once it emerges from default, the ratings on the defaulted bonds would be lifted, too. The biggest boost to ratings would come from a large reduction of Greece's debt stock. Needless to say, that's not on the table.
Questions to be answered:
The methods used by rating agencies have been criticized as contributing to the economic downturn of 2008 and beyond. Do you think the rating agencies are to blame for the recession? Why or why not?
In a perfect world, what role would the rating agencies play in a global financial market? Are they necessary? Why or why not?