And if the rating itself transformed into a kind of risk for the country? Alexander Kockerbeck, (50) chief analyst for Italian sovereign risk at Moody's until mid-July 2012, raises some questions in his first interview since his resignment last summmer after the downgrade of Italy from A3 to Baa2 with a negative outlook, two levels above junk, one level below S&P and two levels below the A- of Fitch.

This latest downgrade - the third within 9 months after the 3-notch cut in october 2011 from Aa2 to A2 and another downgrade from A2 to A3 in february 2012, led to his decision to distance his view from Moody's. Kockerbeck is challenging the concept of „event risk" in Moody's methodology which may cause circularity in the rating, especially in a crisis scenario. Even though event risk such as the potential loss of market access of the sovereign or of banks for refinancing operations is a valid point to look at, the regular use of this argument to cut ratings can become circular when investors stop financing because they fear another downgrade. Kockerbeck makes the following point: immagine I tell the investor that I fear a buyers strike for Italian bonds due to a „sentiment change" and „contagion risk" and therefore downgrade the country. The investor can then make the point that he is going to stop buying the bonds. This further strengthens the argument for a downgrade. It can create a dangerous downward spiral for the sovereign and the banking system which traditionally holds important amounts of Italian government bonds.

Q: The downgrade in July 2012 came as a bad surprise. In the past Moody's was known for a less aggressive stance, mainly by taking into account strengths and weaknesses of a country in a medium to long term perspective, thereby abstracting from short term and rather cyclical economic and financial developments. There was room for considering a relatively low private debt level, a banking system with rather conservative risk on its balance sheet as well as a relatively solid industrial base and pension system outlook. Why all these downgrades to Baa2?

A: I agree this is an important break with the past. The approach seems more based on the mainstream fear of „contagion" during the financial crisis. Well, you can try to catch this fear within the rating. But isn't it more important to check whether this fear is justified, whether this is a temporary period of „bad market pricing" and what the remaining options are on the country and European level? Recent developments show it would have been worthwhile to carefully look at these points in a balanced risk analysis. Today, as an independent analyst and advisor I check Moody's public documents and get the feeling that in all downgrades of the Italian sovereign since october 2011 there is one famous argument showing up all the time: funding risk, based on „market sentiment change" and „contagion risk".

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