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Questo articolo è stato pubblicato il 22 gennaio 2013 alle ore 11:46.


Q: This looks as if the same arguments have been put forward several times to justify a series of downgrades close to junk level..

A: Indeed, in February 2012 the so called „repositioning" of sovereign ratings in Europe was meant to finally include the main
potential risks of the European debt crisis, including the potential default of a eurozone country or a country's eventual exit from the eurozone. This repositioning was explained in a special comment and led to another downgrade from A2 to A3 of the Italian sovereign rating. Only four months later, in July, when the structural reform programme of the Monti government was gaining further credibility, the Italian sovereign rating was again cut by two notches from A3 to Baa2 with a negative outlook. The press release enumerates the main reasons for the downgrade: funding risk, contagion risk with Greece more likely to exit the eurozone, and a weak economic growth outlook. I think we heard all this before...

Q: Investors probably had a hard time to understand what was going on at Moody's... Another motivation to sell Btps...

A: I think the acceleration of the downgrades during the crisis is also a consequence of Moody's relatively new and published rating methodology. It enumerates four factors for the analysis of country risk: economic strength, institutional strength, government financial strength and the country's susceptibility to event risk. By the way, most of these factors are well known by every economist since they are part of the public debt equation. However, the fourth factor, „event risk", looks a bit like an Alien in the analysis. How to capture this risk in a consistent way during a crisis? As an example, an important aim is to assess the likelihood of a sudden loss of market access and the country's solvency risk deriving from that. Indeed, it seems „event risk" has become the factor with the biggest impact on the rating outcome during the crisis. However, since the biggest part of this risk seems to be linked to investor behavior, giving guidance to the investor is key by presenting sound fundamental analysis, thereby considering all options available at country and European level.

Q: So in your view what is the main job of a rating agency?
A: I think the role of a rating agency is to indicate relative risk of default in a way that enhances the efficiency and the functioning of financial markets. I am not sure whether the rating action in July has contributed to this.

Q: So why did you let this happen then? You were the lead analyst of Italy at that time, couldn't you prevent the downgrade?

A: It's different from what you may think. The „one man one vote" rule at Moody's means that a majority of analysts can outvote the lead analyst's recommendation. At the end of the day, the published rating is a point assessment based on a majority vote that cannot reflect the total spectrum of information that has been discussed. This means the market knows the final rating, but it does not know the diversity of opinions that can appear during a rating discussion. The information delivered with the rating is the one that backs the outcome. However, nobody really knows whether the final rating is the right one.

Q: Wouldn't it make sense then for the rating agencies to publish „minutes" of the rating discussion like the Fed does for their monetary policy decisions?

A: A stronger focus on a rating range may also be helpful, thereby discussing the distribution of default probabilities depending on different scenarios and their likelihood to materialize. So the rating agency would deliver the analysis and different potential scenarios, and the investor – not the rating agency – would make the final bet. However, the rating business and – unfortunately – also financial regulation work with point assessments of risk, and every economist knows that point assessents are prone to errors. So analysts continue to look for the one and only right rating that does not exist. Especially during a crisis this favours frequent changes in the rating with all the potentially negative consequences we have seen.

Q: Now the spreads have strongly declined, market fears have come down substantially and the ECB is acting as a liquidity bridge whenever necessary. This means „event risk" has come down. When does the Italian sovereign rating go up?

A: The removal of the negative outlook would be the first step to make here I think. In early summer 2012 the Bank of Italy made the point that around 200 basis points of of the high spread of Italian Btps against German Bunds could not be explained by fundamental economic and fiscal analysis. And indeed, in the second half of 2012 the spread came down and these „unexplained" 200 basis points disappeared, helping the Italian bond market to become one of the best performing until year end. Furthermore, I think it is not naive to expect the continuation of reforms in Italy. Recent experience in France demonstrates how tight the room for maneuver is also in case of a fundamental change in government. I think the political class in Italy has understood the risks around a potential loss of market confidence in case of non-delivery of reform and stabilization results. Economic weakness and rising unemployment during the reform process need to be tackled. However, it seems Moody's is the most pessimistic of the three main rating agencies on Italy.