From the moment the economic crisis gained momentum, financial “rating” companies have been vying to have the most significant negative impact. In this noble fight, Moody’s has undoubtedly penned their masterpiece, dropping its evaluation of Italy’s public debt by not one, but two steps. The significance of this downgrade means that the interest on Italy’s debt will be higher, and the government balance sheet will be that much worse.
I do not wish to revisit the well-known criticism of the quality and methodology of these “rating” companies. I only wish to make a sensible analysis of the motivations behind the death sentence.
Assuming that Italy is “more likely to experience a further sharp increase in its funding costs or the loss of market access … due to increasingly fragile market confidence, contagion risk emanating from Greece and Spain and signs of an eroding non-domestic investor base,” Moody’s sentence goes on to maintain that Italy’s outlook is poor, “as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets. Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding.”
These affirmations seem to be borne out of a bit of cruel irony. The rating company is forced to admit that the deterioration of Italy’s prospects is due to the fact that the Italian government carried out to the letter (for better or for worse) the recommendations made by Moody’s itself just five months ago. Recommendations that by their very nature would have clearly caused higher unemployment and less growth, but at the same time were supposed to have fostered the repair of the government balance sheet, and therefore a recovery of the economy.
The next paragraph of the rating action reaches an uncomfortable level of macabre humor, when Moody’s reveals that the Baa2 rating (a terrible evaluation, considered practically rubbish) is being awarded to a country that nonetheless enjoys a primary surplus and a diversified economy that is capable of weathering the crisis, a country that has had substantial success in implementing structural reforms that, if they are maintained for the next few years, “could improve the country’s competitiveness and growth potential over the medium-term.”
Moody’s is essentially telling us that we have done what they suggested, and, maybe as a direct result, investors should stay away from our debt because it has become that much more unsafe.
This latest judgment may not have tragic consequences, due to rating agencies’ progressive loss of credibility, but it certainly highlights the terrible risk we are facing, thanks to the inability of European politics to meaningfully implement the instruments of solidarity that are needed to allow a recovery in the increasing number of ailing “peripheral” EU states.
We all know that cuts and restrictions inevitably hamper any economy and increase unemployment. We accepted these sacrifices because, in the scope a common European policy, they would have allowed us to overcome the crisis and given us a solid chance at reducing our debt.
Now we are being told that we did what had to be done but it was all for nothing because, given the combination of austerity measures, slower growth, and increased unemployment, the sacrifices themselves have only resulted in pushing any chance of recovery farther away.
A message of support for Mario Monti from the office of the German Chancellor rings a bit hollow in this context, although it is certainly appreciated. The author of the message may not have read that concerns over Italy’s uncertain political prospects were among the reasons for Moody’s declassification. Don’t Germany’s leaders understand how difficult it is to have a stable political horizon when the citizens are only presented with pessimistic predictions?
The truth is that a growing number of Italians is coming to the realization that, if things don’t change, not even getting all of our “homework” done on time will earn us a passing grade. It may not even be worth studying at all anymore, unless the textbooks are updated, maybe by adding a chapter or two by Keynes.
This is the message delivered to Italians by this improvident and inconsiderate sentence, and may those who hold the future of Europe in their hands take it into account. May they take it into account before fury and desperation render the courageous sacrifices that Italy has made, and continues to make, utterly in vain.