Article 5.1 Italy accuses S&P of not getting ‘la dolce vita'

By Stephen Foley and Guy Dinmore

Financial Times February 4, 2014

If financial analysts had spent more time admiring a Michelangelo fresco or reading Dante instead of poring over spreadsheets, they might not have touched off the inferno that engulfed the Italian sovereign debt market, Italy's state auditor is claiming.

Standard & Poor's revealed on Tuesday it had been notified by Corte dei Conti that credit rating agencies may have acted illegally and opened themselves up to damages of ˆ234bn, in part by failing to consider Italy's rich cultural history when downgrading the country.

The potentially gigantic claim, which S&P dismissed as ‘frivolous and without merit', relates to the string of downgrades the rating agency issued on Italian debt when the eurozone crisis intensified in 2011.

Notifying S&P that it was considering legal action, the Corte dei Conti wrote: ‘S&P never in its ratings pointed out Italy's history, art or landscape which, as universally recognised, are the basis of its economic strength.'

An official in Italy confirmed the judicial inquiry into S&P and its smaller peers, Moody's and Fitch.

Previous reports have indicated the auditor is considering whether ‘reckless' rating agency reports on Italy's public debt contributed to a worsening of the sovereign debt crisis, forcing the governments of Silvio Berlusconi and then Mario Monti to take emergency measures.

While it remains uncertain that the claim will be brought, the auditor's dramatic threat - and the size of damages it has suggested - reflects anger in European political circles at the role played by rating agencies in the market turmoil that threatened the eurozone.

The prospect of sovereign downgrades caused waves of selling of government debt from countries such as Italy and Spain, raising their borrowing costs and further damaging their public finances.

A spokesman for Moody's also said the allegations were without merit.

Fitch said it would co-operate with the probe. ‘As we understand the prosecutor's concerns, we believe Fitch at all times acted appropriately and in full compliance with the law.'

FT

Source: Foley, S. and Dinmore, G. (2014) Italy accuses S&P of not getting ‘la dolce vita', Financial Times, 4 February.

The rating agencies are constantly reviewing countries to detect reasons for thinking that default risk has improved or deteriorated. As Article 5.2 shows, in the years following the financial crisis there were some dramatic changes, with Europe declining and developing countries prospering.