A few hours following my post though obviously not in response to it the Daily Telegraph published an article by Ambrose Evans-Pritchard defending the credit rating agencies. Allegedly "suppressing" the credit rating agencies amounts to "suppressing" free speech. Evans-Pritchard even goes so far as to adapt in their defence Pastor Martin Niemoller's famous poem "First they came...", which given that this poem concerns the Nazi genocide some of us might feel is both tasteless and grotesque.
What is bizarre about Evans-Pritchard's article is that he actually concedes the main part of the case against the credit rating agencies, which is that they absurdly over assessed the credit worthiness of the Mediterranean economies before the crash. What I find still more bizarre is that though he admits the credit worthiness of the Mediterranean economies was grotesquely over assessed he nonetheless says that the bond holders who made loans to these economies in "good faith" should be protected and even "cherished". Instead he puts all the blame for the catastrophe in the Eurozone squarely on the euro.
Let me say at once that I accept some of the case that is being made against the euro. As I shall argue in a later post the way the euro was created was almost guaranteed to exarcebate the differences between the more industrially advanced economies of the north and the poorer and more backward economies of the south. That does not justify using the euro as a scapegoat to shield the international financial community from its mistakes. Why should mere membership of the Eurozone encourage lenders to throw caution to the winds and lend money to fragile economies without heed to their underlying lack of competitiveness and their deteriorating balance sheets? Why should membership of the Eurozone encourage credit rating agencies to over assess the credit worthiness of those economies? Why should bond holders engaging in commercial decisions be protected from their losses? Why should credit rating agencies that blundered so catastrophically be allowed to walk away with their reputations and authority intact? Lastly, why should bond holders who relied on these credit rating agencies be protected?
Ambrose Evans-Pritchard's article is in fact a classic example of the refusal of advocates of untrammelled free markets to practise what they preach. The reality behind the over assessment of the Mediterranean economies by the credit rating agencies and the willingness of private lenders to lend to these economies in disregard of their economic fundamentals is that an assumption existed that if any of these economies ran into serious trouble Germany would pay to bail them out. Nothing in the European treaties or that the German or any other government ever said ever so much as hinted at such a thing. On the contrary the relevant treaties and repeated statements by the German government made it absolutely clear that the Eurozone is not a transfer union and that Germany does not stand as guarantor for the debt of any other country merely because that country happens to use the euro. Anyone who loaned money to such a country on that assumption was therefore quite simply making a mistake for which they have no one to blame but themselves. To talk of such lenders acting in "good faith" and of the need to "cherish" such lenders is therefore preposterous. That however is what Evans-Pritchard is saying, which is another way of saying that he thinks that despite the clear language of the treaties and of the numerous statements of the German government bond holders who foolishly made loans to these countries should be allowed to keep their profits whilst the overburdened German tax payer should shield them from loss.
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