The Great Debate

Last week the world witnessed an intense debate. On two occasions Moody’s, the risk-rating agency, attacked European Union economic decisions, first questioning the financial health of Portugal and then, the following day, raising doubts about the integrity of the European Bank.

Faced with the first of these announcements, markets reacted by devaluing Portugal’s debt to short-term bonds. But when the doubts raised by Moody’s were extended to the big banks, it was the European Community leaders who responded harshly: In abrupt interventions, the risk-rating agency was radically discredited.

The fact is that just three years after the collapse of Lehman Brothers and the gigantic sub-prime mortgages fraud, it is valid to question the quality of the analyses carried out by the big rating agencies, that is to say, North American ones. An incensed Europe is once again asking itself what on earth these pretentious companies were doing three years ago, and how they were unable to foresee the enormous scope of the crisis which ensued.

The stream of criticism against the big rating agencies has hit a nerve. How do these companies categorize the United States’ debt? What do they think about the future of the dollar? Why do they demonstrate such tolerance towards gigantic North-American deficits yet so much severity towards the economic management of other nations? What is beyond question is that the analysis of Portugal carried out by Moody’s was discredited when Jean-Claude Trichet, president of the European Central Bank, ordered the negotiation of all Portuguese government bonds, the same ones that just two days before had been declared hopeless by Moody’s. Trichet, as well as making criticisms, responded with facts.

But the debate is more than just anecdote. The prestigious English historian Paul Kennedy took the opportunity to affirm that, in a few short years, there will be three currencies of reference: the dollar, the euro and the yuan. In fact, the three currencies represent three different models of economic management: the considerably free-market North American model, the European model of moderated dirigisme and the Chinese model of almost absolute control.

At present more than 60 percent of reserves are represented in dollars. Since the dollar offers no guarantees for the future — at least as long the North Americans do not take action to climb down from the debt cloud where the ineffable George Bush left them — serious experts advise that reserves be made available in a selection of strong currencies.

Rather than risk-ratings agents, what is required are independent analysts (such as Warren Buffett) and heavier state control. There is fierce opposition to state control, as demonstrated by the Colombian economist Alejandro Gaviria, for whom Colombia is a “republic of shysters” due to the fact that some lawyers maximize their litigious ability.

Perhaps Gaviria is dreaming of presiding over Moody’s or some such organization, so that his errors of judgment can affect as many people as possible.