Rating Agencies and the European Union Sovereign Debt Crisis: An Ethical Approach
Santacana, Ramon, Siles, Javier, Journal of International Business Ethics
Abstract: Credit ratings have become a key factor in today's financial markets. Their importance influence not only private finances but, also, they influence a country's finances, budget, economic policies, politics, and, in the case of Europe, credit ratings are modeling the whole EU structure and institutional development Today, credit ratings are affecting the wealth and welfare of entire populations. The possibility of "inside" credit ratings has important economic and social implications and deserves study from an ethical point of view. In the present paper, we analyze the role Credit Rating Agencies (CRAs) in the European Union Sovereign Debt Crisis and its ethical implication. Using a historical, descriptive, and comparative methodology, this paper first presents 1) the development of the European Union sovereign debt crisis, then compares 2) the levels of debt in relevant developed countries, 3) presents the relevance of Rating Agencies in the financial markets, 4) analyzes their role in the European Union Sovereign Debt Crisis, 5) assesses the updating of CRAs regulation, 6) reviews the feedback from governments and other Institutions and 7) draws some conclusions and recommendations.
Keywords: credit rating; European Union; debt crisis
European Union Sovereign Debt Crisis Development
The European Union Sovereign Debt Crisis has been one of the hottest topics debated in news and financial analysis. We aim to study, from an ethical perspective, this subject, and, more specifically, the role that rating agencies play in the development of the events. Let us begin with a brief review of the main events. European countries' debt was not considered an issue until 2010 when came reports indicated that total Eurozone sovereign debt was euro7,862 billion. However, most economists "trace the beginning of the European sovereign debt crisis to 5 November 2009, when Greece revealed that its budget deficit was (...) more than twice what the country had previously disclosed " ( Voss, 2011). The deep causes of this crisis can be traced to the very structures and players that govern European institutions.1
The debt crisis revealed fundamental economic differences between northern and southern European countries. Some Southern European countries have had increasingly high debt levels, higher unemployment, and a loss of competitiveness. Northern Europeans tend to have lower debt levels and don't think they should compensate other countries' wrongdoings. However, there is a consensus among countries in the EU to continue the Union, and all together have to find the solutions. Below is a condensed timeline of the sovereign debt crisis development in Europe.
European Sovereign Debt Crisis Timeline
* 1992-The Maastricht Treaty was signed, creating the European Union (EU). Its members are required to: keep low and stable inflation; keep low deficits and debt and have pro-growth policies; have stable exchange rates. The most important factor with regard to the European sovereign debt crisis will prove to be the fiscal requirements.
2004-November 22: Greece admits that it manipulated the government's fiscal convergence criteria in order to gain admittance to the Eurozone.
2009- November 5: Greek Prime Minister announces that Greece's annual budget deficit will be 12.7% of GDP - more than twice the previously announced figure.
-December 8-22: Fitch and S&P ratings cut Greece's sovereign credit rating to BBB+ from A- with a "negative outlook." Moody's cut it from A2 to Al.
2010- Greece initiates three different austerity packages.
-Jean-Claude Trichet, President of the European Central Bank (ECB), extends less-restrictive collateral rules.
-Credit ratings downgraded: Portugal down 2 levels, Spain and Ireland down 1 level, and Greece downgraded to Bal=junk status.
-Eurozone nations and the IMF agree to a euro110 billion bailout plan. Eurozone nations must provide euro80 billion and the IMF euro30 billion to help bail out Greece. …