Italy Raids S&P, Moody

Lost in the hubbub of S&P downgrading the US bond rating is news that the Italian government has the ratings agencies under criminal investigation.

Lost in the hubbub of Standard & Poor’s downgrading the US bond rating is news that the Italian government has the ratings agencies under criminal investigation.

The Guardian‘s John Hooper:

As stock and bond markets across the world tumbled on fears about Italy and Spain, it emerged that police acting on orders from prosecutors had raided the Milan offices of rating agencies Moody’s and Standard & Poor’s as part of continuing investigations into their role in the recent financial turmoil.


Carlo Maria Capistro – chief prosecutor of Trani, a small Adriatic port – told Reuters that his office was checking to see whether the rating agencies “respect regulations as they carry out their work”. The raids took place on Wednesday as Italy’s prime minister, Silvio Berlusconi, addressed parliament on the mounting crisis.

He and other leading Italian politicians often cite speculation as a cause of market storms that involve a run on the country’s shares or bonds. And the media habitually depicts sell-offs as attacks on Italy.

S&P, which along with other rating agencies has been strongly criticised in Europe for downgrading countries such as Greece, said in a statement it believed the Trani inquiry “has no foundation”. It added: “We shall strenuously defend our work, our reputation and that of our analysts.” Moody’s said it took “its responsibilities surrounding the dissemination of market-sensitive information very seriously”, and was co-operating with the authorities.

The Trani prosecutors began investigating Moody’s in May last year after a complaint by two consumer associations about a report from the ratings agency which said the Italian banking system was at risk from the crisis in Greece. It sparked a round of selling on the Milan bourse. It is not clear why the consumer groups took their grievances to out-of-the-way Trani, but Italian prosecutors have wide, discretionary powers to look into alleged offences brought to their attention.


Standard & Poor’s came under scrutiny in May after it threatened to downgrade Italy’s credit rating because of its huge public debt. Italy is proportionately the second most highly indebted country in the eurozone after Greece.

The inquiry has since been widened to include a report by S&P last month in which it criticised the government’s austerity measures. Those questioned by the Trani prosecutors include the president-designate of the European Central Bank, Mario Draghi; Italy’s finance minister, Giulio Tremonti, and a former prime minister, Romano Prodi.

A separate inquiry is being conducted by prosecutors in Rome into market panics in June and July. Italy’s stock market regulator, Consob, last month summoned Moody’s and S&P for meetings and urged them not to release their statements during market hours.

Elio Lanutti, president of one of the consumer groups that sparked the inquiry, said: “The three ‘sisters’ – Standard & Poor’s, Moody’s and Fitch – are an erratic danger to state sovereignty in the areas of economics and finance”.

This certainly sounds like a fishing expedition and attempt at intimidation rather than a legitimate inquiry into broken laws. But, while Italy is taking this much too far, Lanutti’s statement would get widespread agreement in the capitols of Europe. The American government’s response to the S&P downgrade is to push back against the analysis and facts used to reach it. European governments, on the other hand, are outraged by the notion of private business groups having the temerity to issue judgments on sovereign states.

Ambrose Evans-Pritchard, international business editor for The Telegraph, proclaimed last month, “Europe declares war on the rating agencies.” Soeren Kern,  senior analyst for transatlantic relations at Madrid’s Grupo de Estudios Estrategicos (Strategic Studies Group), rounded up bitter reactions from notable European leaders:

Consider, for example, the reaction of Viviane Reding, the European commissioner for justice. Reding told Germany’s Die Welt newspaper: “Europe cannot let itself be destroyed by three American private companies.” She added: “I see two possible solutions: either the G-20 states agree together to smash the cartel of American rating agencies. Or independent European and Asian rating agencies are established.”

European Commission President José Manuel Barroso accused the agencies of “mistakes,” “exaggerations,” “conflicts of interest,” and of having an anti-European “bias.” Barroso asked: “Is it normal to have only three relevant actors on such sensitive issues where there is a great possibility of conflict of interest? Is it normal that all of them come from the same country?”

Attacking the domination of the ratings sector by the Americans, Barroso continued: “It seems strange that there is not a single rating agency coming from Europe. It shows there may be some bias in the markets when it comes to the evaluation of the specific issues of Europe. It is important that we do not allow others to take away our ability to make judgments.”

The unelected Barroso also said it was time for a European ratings agency to emerge as a counterweight to the U.S.-dominated groups: “We know that when there are oligopolies there are sometimes attempts to abuse the dominant position or market manipulation, so the more competition the better — this is our credo.”

German President Christian Wulff said it was shocking that the rating agencies continue to exercise so much power, and warned of the need for policymakers to “re-conquer the primacy of politics.” German Finance MinisterWolfgang Schaeuble said he “cannot decipher” the recent ratings downgrades of Portugal. “We need to examine the possibilities of smashing the rating agency oligopoly,” he added.

European Commissioner for Internal Market and Services Michel Barnier said something must be done to cut the “power and influence” of the American agencies. In true Eurocrat fashion, Barnier also issued a veiled threat: “I invite the agencies, which are under the control of national supervisors, to be extremely careful to fully respect EU rules. They should learn the lessons from the past.”

Greek Foreign Minister Stavros Lambrinidis criticized the behaviour of the agencies as “the wonderful madness of self-fulfilling prophecy” because it made it harder for insolvent countries like Greece and Portugal to borrow to keep afloat. Never mind the “madness” that European leaders have allowed themselves to believe they can borrow forever without ever having to pay back the debt they have accrued.

European Commissioner for Economic and Monetary Affairs Olli Rehn accused Moody’s of “so-called clairvoyance.” Greek Prime Minister George Papandreou said the ratings agencies were “seeking to shape our destiny and determine the future of our children.” As if the rating agencies accumulated the mountains of Greek debt.

Luxembourg Prime Minister Jean-Claude Juncker said the influence of American credit rating agencies was “disastrous.” The Italian chief economist of the OECD, Pier Carlo Padoan, said of the ratings agencies: “It’s like pushing someone who is on the edge of a cliff. It aggravates the crisis.”

German Foreign Minister Guido Westerwelle called for the creation of a European rival to the three agencies. “It is necessary to establish an independent European rating agency. This must be a goal that we all work on intensively,” he said.

Whether it makes sense for Europe to have its own ratings agency to break the monopoly of the American Big Three (although, as Kern notes, Fitch is majority-owned by a French firm, Fimalac) is beyond my expertise or interest. But, certainly, if there’s any value in having independent ratings agencies, it’s lost if it’s under the control of the governments it’s supposed to be rating.

Beyond that, using the power of the state to intimidate the existing agencies for daring to express an analytic view of the political processes of Italy or the EU is simply outrageous.

Via John Personna. Photo credit: Reuters Pictures.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College. He's a former Army officer and Desert Storm veteran. Views expressed here are his own. Follow James on Twitter @DrJJoyner.


  1. john personna says:

    Nobody likes to be downgraded.

  2. legion says:

    Well, there’s also a systemic problem to address – ratings agencies have enormous control over (damn near literally) uncountable amounts of money. The temptation for speculation & manipulation is completely unmanageable. The only way to even attempt to control such issues is total transparency of who’s getting paid to do what, but that’s the last thing any of those companies is going to allow. And as for the sovereignty question – yeah, that’s another symptom. They already overstepped their bounds in the US debt ceiling debate, attempting to insert themselves into the governing process by dictating aspects of the deal. That alone should get huge swaths of upper management fired and/or criminally investigated, but of course it won’t…

  3. OzarkHillbilly says:

    Beyond that, using the power of the state to intimidate the existing agencies for daring to express an analytic view of the political processes of Italy or the EU is simply outrageous.

    Anyone want a banana?

  4. Gulliver says:

    Gee, what a coincidence…

  5. Rob in CT says:

    “Outrageous” seems to be a feature with Silvio, not a bug.

  6. john personna says:


    Well, there’s also a systemic problem to address – ratings agencies have enormous control over (damn near literally) uncountable amounts of money.

    I think the thing that’s not literal is the “control” part. The ratings are opinions, like movie reviews, and while small players may have strict rules about following them, I can’t believe the big market-makers do.

    I mean, I keep drilling on the example of China. They are a huge buyer of US treasuries, and they have their own ratings company, Dagong. I expect it is at least half house-organ of the Chinese government, and tells us what they want us to hear.

  7. legion says:

    @john personna: Yes, but there are numerous entities out there that _are_ driven by (and therefore beholden to) the ratings agencies – they must, by their own rules, hold AAA-rated papers. If the rating goes down, they have _no choice_ but to sell off those holdings & replace them with better-rated (note I do not say ‘safer’) pieces of paper.

    Sure, _somebody_ is always going to be willing to buy US debt, just as somebody is always going to be willing to buy Chinese debt. But knowing when (ore better yet, _controlling_ when) a lot of people are going swap a bunch of those papers around allows a vast amount of profit to be made…

  8. Lit3Bolt says:

    Dr. Joyner welcomes his international financial corporate overlords warmly and gladly and trusts them more than any government.

    Ok that’s lame snark, but look at it from the European point of view. The Big 3 ratings agencies were complicit in the financial crisis that have caused all this debt in their countries. You could say they were the direct cause of the financial crisis because they gave AAA ratings to sub prime crap and encouraged greedy and speculative lending, which led to greedy and speculative borrowing. And we’re supposed to trust these public corporations who have control over literally all the money in the world because….they took Business Ethics 101 in school? They’re beholden to their shareholders? They took an oath to practice nothing but good, honest business?

    They were a party to fraud, and when the financial world woke up to what they had created in 2007, they still hushed it up and pretended with the help of arcane financial techno-babble that everything was hunky dory until 2008. So they’re either pretty bad at financial matters (unlikely) or they kept it to themselves, meaning they failed to oblige their core business and logically should be more untrustworthy now.

    You can defend their “private business” all you want, but these corporations have now turned themselves into public and political entities. In my view, the more power a corporation has, the more transparency and regulation there needs to be. Italy, Greece, Portugal have been pushed into a corner by these foreign corporations and now with the threats of default they have literally nothing to lose by invading the ratings agencies’ areas of business.

    Dr. Joyner, I know it’s beyond your area of expertise, but in your view, how should the problem of a potentially fraudulent financial corporation issuing ratings over debt-wracked nations be resolved? More to the point, do you approve of the vast political power that the Big 3 ratings agencies wield in world politics? Should all world citizens accept their interpretation of political events, and also their dictates on how a government’s finances should be managed?

  9. john personna says:


    I believe you are making an outmoded, or naive, claim. I mean, Treasury rate just fell as MORE people bought them this morning:

    10-Year US Treasury Yield Lower Than Prior To S&P Downgrade

  10. john personna says:


    And we’re supposed to trust these public corporations who have control over literally all the money in the world because….they took Business Ethics 101 in school?

    No, you are supposed to relax because they don’t “control.”

    It’s the difference between book learnin’ (simplification) and the real world.

  11. James Joyner says:

    @Lit3Bolt: I don’t have any expertise on how good S&P and their ilk are at doing what they do. I merely posit that:

    1. It makes sense to have independent ratings agencies

    2. It makes no sense to have governments rate their own credit worthiness

    3. Even if S&P and Moody’s suck, it’s unconscionable to use the criminal investigative powers of the state to coerce them

    Now, if there’s evidence that their AAA ratings of bad firms was done in a manner that violated the law, rather than simply shoddy analysis, then by all means investigate that. But it doesn’t appear to be what’s happening here.

  12. Moosebreath says:


    I’ll agree with your points (especially number 3 — if Obama were half the monster jan and bithead think he is, we’d be talking about the US doing this, not a clown like Berlusconi).

    That said, ratings agencies are not really independent — they just aren’t controlled by the government. They know who is paying their bills, and outside of sovereign debt, it’s the party whose credit they are reviewing. As a result, when they review private credit, they need to be far more optimistic than is justified, or the borrower will take their business elsewhere.

  13. lunaticllama says:

    The developing world has had to deal with the political judgments of the ratings agencies for decades, and no one cared. Not sure why anything should change simply because they are now stepping on the toes of rich countries.

  14. legion says:

    @john personna: Well, there’s two things… a) S&P is just one agency. The big non-story story is that the other 2 major agencies had already gone public deciding to keep our rating stable before S&P made their own decision. And b) I didn’t mean to imply that S&P was actually any good at manipulating things, just that ratings agencies are in such a position that the temptation to do so is immeasurable. In fact, I’ve seen an increasing number of articles today by “insiders” describing S&P as basically the “short bus” of the financial world, so that may have some bearing back on point a)…

  15. legion says:

    And on a related note, I see the confusion mounting over the rush to buy Treasuries & different people trying to explain it… The cynical bastard in me wonders if the people doing the buying today are the same undereducated Teahadi types who keep shouting that the Gummint needs to stop interferin’ with their Medicare. Any minute now you’ll see Fox News interviewing some trader demanding the gov’t get out of his T-bills…