Ratings Firms Misread Signs of Greek Woes

When it comes to Greece, critics say Moody’s should have been tougher a lot earlier.

Until two years ago, the ratings agency took a relatively lax approach to growing signs of troubles in Greece, epicenter of the current crisis, even as the country plowed ahead with a borrowing binge that jeopardized its fiscal condition.

Moody’s held off dropping its strong A rating of Greece’s bonds despite growing political turmoil and economic woes through 2009. Investor fears over Greece’s short-term financing needs were “misplaced,” Moody’s said in a report in early December 2009. Twenty days later, after a review, the agency downgraded the nation’s debt, the last of the major ratings agencies to do so.

After that, the ratings of the debt-ridden country went into a virtual free fall, and within six months Moody’s assessed its debt as much riskier for investors, giving it junk status.

“If you look at the fact that this is going to be a country that is going to default on its debt, and two years before it was still single A, that is a very, very precipitous fall,” conceded Pierre Cailleteau, Moody’s head of sovereign debt ratings until he left in spring 2010. He rated Moody’s performance as mediocre, but added that it could have been worse.

That rapid deterioration underscores how, critics say, the credit ratings agencies that judged Greece’s debt as investment grade for most of the last decade missed or badly misread signs of trouble. Moody’s held its rating steady even after Greece in 2004 admitted lying about its deficits to join the countries using the euro in 2001. Now, the ratings agencies are under fire from European regulators about whether their recent downgrades of Italy and Spain worsened an already tenuous situation.

Moody’s offers a rare look inside the sometimes fierce debates over Greece’s deep problems, at how the prevailing belief that Europe would not let Greece default on its obligations drowned out opponents, and how in hindsight the agency could get it so wrong.

Moody’s lapses before last year helped embolden Greece to heap on billions in sovereign debt and encouraged investors to invest more heavily in its debt. Now some of those buyers face 50 percent losses on the bonds — loans that carried the agencies’ stamp of approval but that Greece can no longer afford to pay off. Had the rating agencies been more skeptical of euro zone countries’ borrowing beyond their means, critics say, that might have slowed the debt carousel for Greece and others.

The higher credit ratings made it “easier to raise debt” than to raise taxes or make other unpopular and painful economic adjustments, said Barbara Ridpath, head of Standard Poor’s ratings activities in Europe between 2004 and 2008.

“The credit rating agencies failed in their job,” said Wolf Klinz, a European Parliament member from Germany and author of a critical 2010 report on ratings agencies. “They held on artificially too long to their original rating. They should have started earlier.”

The agencies have defended their performance, noting that investors were much more optimistic than the agencies were, with bond markets assigning interest rates to Greek debt at levels that were just slightly above what Germany was paying.

“The market was scarcely differentiating between any of the 16 sovereign members of the euro zone,” said David Beers, the head of Standard Poor’s global ratings business, during a British parliamentary hearing last summer. “We differentiated these opinions from the outset. The market ignored those opinions for many years.”

In an e-mailed statement, a spokesman for Moody’s agreed, saying the market’s perception of the safety of Greek bonds was equivalent to an AAA rating, “while Moody’s rating was considerably lower.”

The current crisis was years in the making. It was born of Greek leaders who misled the European Union with false economic statistics to gain entry to the euro; of European policy makers who turned a blind eye to Greece’s deceptions; of banking regulators who deemed sovereign debt virtually risk-free; and of banks and other investors who, hungering for profits, joined in the groupthink that the euro zone would never let a member default.

Niki Kitsantonis contributed reporting.

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