Europe Seeking to Break U.S. Ratings Monopoly

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Ratings agencies have not been kind to European countries
as they struggle with massive national debt

Few doubt that US ratings agencies contributed greatly to the global financial crisis. Europe is now worried that the euro could also fall victim to credit downgrades — and is exploring the possibility of creating its own ratings agency.
People like Brian Coulton aren’t exactly the most popular figures in the financial industry these days. Politicians, in particular, aren’t particularly keen on him and his ilk either. Coulton, the European chief analyst for the ratings agency Fitch, was largely responsible for the downgrading of Spain’s credit rating late last month. It was a move that once again sent stocks tumbling in New York and the euro down against the dollar.
Coulton doesn’t accept any of the blame. “We performed our assessment, and that’s it,” he said tersely. The reason for the downgrade, he added, is concern that the austerity program announced by Spanish Prime Minister José Luis Rodríguez Zapatero on the previous Thursday would throttle economic growth. He declined to comment further.
In the midst of the euro crisis, the highly indebted countries are embroiled in a grotesque dilemma. The rating agencies will punish them if they don’t get their gigantic mountains of debt under control. But the same agencies will also downgrade them if the governments impose austerity programs to reduce their debts.
In this sense, the crisis is feeding the crisis, as a downward spiral gets underway. Many critics blame the major rating agencies, Moody’s, Standard & Poor’s and Fitch. “Whatever you do, you’re doing it wrong,” says Gustav Horn, head of Germany’s Macroeconomic Policy Institute, referring to the countries in question. Berlin economist Michael Burda criticizes the timing of the Spanish downgrade most of all, which couldn’t have been worse.
Aura of Infallibility
In the United States, where the rating agencies are based, they have long since lost their aura of infallibility. The agency that supervises the markets, the Securities and Exchange Commission (SEC), as well as dozens of companies and private individuals, have filed damage suits against the rating agencies for having failed entirely in their assessments of billions of dollars worth of investment vehicles backed by subprime mortgages.
Because the issuers of the toxic securities paid for their ratings, the agencies constantly found themselves in a conflict of interest. “We rate every deal. It could be structured by cows, and we would rate it,” a rating analyst wrote in September 2007. Meanwhile, investors blindly trusted the overly rosy assessments, which contributed greatly to the eruption of the financial crisis.
Last Wednesday, two prominent industry leaders appeared at a Congressional hearing in Washington, D.C. In addition to Moody’s CEO Raymond McDaniel, investing legend Warren Buffet, in his role as a major shareholder, attempted to downplay the blatant mistakes that were made. “The entire American public was caught up in a belief that housing prices could not fall dramatically,” Buffet said under oath, calling it a “mass delusion.” He said that he too was wrong.
But even if the ratings agencies have taken a beating since the financial crisis, an alternative rating system is not yet in sight. Credit ratings are still an important decision-making factor in the global web of financial transactions. Be it banks, insurance companies or investment funds, all of them manage a large portion of their investments with a view toward three letters: AAA, the highest rating. Should a country’s credit rating falls below a certain threshold, many investors in those bonds, pension funds, for instance, have bylaws requiring them to sell. If the securities are on banks’ balance sheets, regulators require more equity capital as a safety cushion.
As such, ratings often work like gasoline when poured on a fire. Countries lose billions when their credit ratings are downgraded. Investors pull out, causing bond prices to fall. And even though the bonds are then cheaper, they continue to provide the same annual interest, thereby increasing yields.
A Vicious Cycle
The effect means that governments have to pay more to borrow money. Spain, for example, will be facing much higher interest rates now when it seeks to refinance €16 billion worth of bonds which mature in July. The higher interest rates, in turn, makes borrowing riskier and makes the country more vulnerable to further downgrades, which in turn leads to even higher yields — the beginning of a vicious cycle.
These concerns have prompted European Union Internal Markets Commissioner Michel Barnier to seek stricter controls on the three ratings agencies. Under his bill, the new Paris-based EU regulatory agency for the securities industry would also regulate the three ratings agencies, which has been the responsibility of national regulators until now. Barnier’s proposals also call for a tightening of competition among the agencies. Issuers, like banks or financial companies, would be required to make all ratings information public, not just the information that relates to commissioned ratings.
Of course, the Frenchman’s proposals only apply to securities that are used to package and resell loans and mortgages. This is where the EU Commission sees the greatest need for action, based on the experiences of the financial crisis. Ratings of companies or governments, on the other hand, would not be affected.
To break up the de facto US oligopoly, the French camp also advocates the establishment of a European ratings agency. In a recent interview with the German financial daily Handelsblatt, the governor of the French central bank suggested installing private credit insurers like Euler Hermes or Coface as new providers. “They have the knowledge and the relevant experience,” said Christian Noyer, “and they even have to pay when the ratings are wrong.”
More Serious
Noyer’s proposal was well received in Berlin, mostly because market leader Euler Hermes is a wholly owned subsidiary of Munich-based insurance giant Allianz. Its database contains information on about 45 million companies around the globe. Using this information, the company can calculate the probability of default and the corresponding insurance premium for almost every shipment in the world.
The question is whether the credit insurers will operate more reliably than the US agencies, and whether they will calculate credit risk in a different way, thereby solving the Catch-22 dilemma of debtor nations.
In fact, Euler Hermes has not yet downgraded Portugal, Spain and Greece in its internal country analyses. “However, we are working within a much shorter time frame than the ratings agencies,” says CEO Wilfried Verstraete. He notes that 80 percent of the loans Euler Hermes insures mature within six to nine months.
Verstraete doesn’t know yet whether Euler Hermes will get into the ratings business. Although internal teams have been addressing the issue since 2002, the market hasn’t been ready so far. Verstraete believes that the current discussion over a European ratings agency is much more serious than it was two years ago.
“There is enough public pressure to bring about a change,” he says, noting that many are now chafing at the three US agencies. The key question, says Verstraete, revolves around who will pay the bill for incorrect assessments. “We are liable for wrong decisions with our own capital, which is a completely different incentive system than with the ratings agencies,” stresses Verstraete.
In his view, a credible business model can only function if investors, rather than the companies themselves, pay the ratings agencies to rate the securities that they hold.
‘System of Interests’
Of course, the notion of competition isn’t the only motivation behind the French campaign for a European rating agency. Many a politician and professor sees Moody’s and the other two agencies as a US instrument of power. Rudolf Hickel, an economics professor in the northern German city of Bremen, believes that the ratings agencies are incorporated into the “system of interests” of the American financial sector.
Do the agencies act as a beachhead for Wall Street? And by downgrading the ratings of European governments, are they even deliberately providing the ammunition for American euro speculators?
“The accusation of American influence on European ratings is absurd,” counters Alexander Kockerbeck, who is charge of analyzing two major economies, Germany and Italy, at Moody’s in Frankfurt. According to Kockerbeck, a rating committee that decides whether to downgrade a country’s debt by majority decision consists of “about 15 analysts from all regions of the world.”
Economists like Kockerbeck can only partly understand the criticism of the ratings agencies they work for. They want nothing to do with their counterparts from the toxic assets departments, who were singing the praises of packaged subprime mortgages before the financial crisis. They like to point out that country specialists use fundamental analyses and not fly-by-night models to arrive at their assessments. They also have fewer conflicts of interests with which to contend. For image reasons, the agencies usually prepare country ratings at their own expense. Only a few governments, including some in Eastern Europe, commission ratings.
Going to Asia
The wave of speculation against Greece was “triggered not by the ratings agencies, but by Greece itself,” Kockerbeck says sharply. In the past, the country provided false information about the size of its deficit. When its real debt was revealed, the markets reacted with suspicion, which in turn made borrowing more expensive for Athens. “Based on the new numbers, our debt formula logically indicated a lower rating,” Kockerbeck coolly explains.
The Moody’s executive does not believe that governments face a rating dilemma. The causality is not that simple as is sometimes argued, he says. “A government’s austerity plan is one thing, while its implementation is another,” he says. If a country’s economy suffers as a result of austerity measures, Kockerbeck explains, the costs of borrowing relative to government revenues will change in the medium term. For Kockerbeck, the consequence is clear: “We have to take this into account in a rating.”
In his written rationale for the recent downgrading of Spain, Fitch analyst Coulton presents similar arguments to those of his counterpart at Moody’s. But he apparently doesn’t believe that those who are affected will be more insightful in accepting his assessment. To be on the safe side, Coulton isn’t planning to vacation on Spain’s Costa Brava this year. “I’m flying to Asia,” he says.

Few doubt that US ratings agencies contributed greatly to the global financial crisis. Europe is now worried that the euro could also fall victim to credit downgrades — and is exploring the possibility of creating its own ratings agency.

The rating agencies assess and value the credit-worthiness, or ability to pay back a loan, of companies, banks and states. In doing so, the agencies publish ratings as well as assessments of business sectors and management reviews. The most influential rating agencies are Standard & Poor’s (S&P), Moody’s and Fitch, which are known as the “big three.”

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Young African Football Players Are a Hot Commodity in Europe

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A football academy for young players in Bamako, the capital of Mali.

The football World Cup is being held in Africa for the first time this year, but young African players have long been a sought-after commodity among Europe’s top clubs. While some youngsters make it to the top, many players end up on the streets. Critics talk of a new slave trade.

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Americans Run Into Trouble Using Credit Cards Abroad

credit cards abroad 

Americans increasingly run into trouble using credit cards abroad.

Americans are increasingly facing difficulty using their credit cards abroad.Chief culprit? Different technology standards.  U.S.-issued cards still have magnetic strips. More cards abroad are issued with encrypted microprocessor chips, and shops and businesses have adjusted the payment process to the varying standard, says Jack Jania of Gemalto, which develops chip cards.

 

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Financial Crisis in Greece Goes Global, From Asia to the U.S.

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“Greece may just be an early warning signal,” said Byron Wien, a Wall Street strategist.

The fear that began in Athens, raced through Europe and finally shook the stock market in the United States is now affecting the broader global economy, from the ability of Asian corporations to raise money to the outlook for money-market funds where American savers park their cash.

 

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Language Dispute Threatens the Future of Belgium

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Graffiti deface a bilingual signpost in Brussels.

The “survival” of Belgium as a unified country was called into question last night after a row between French and Dutch speakers brought the government to the verge of collapse.  The wrangle has already brought down the government four times in the past three years but the latest spat is the gravest yet and threatens to split the country into Flemish areas and French-speaking areas.

 

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World’s Strongest Beer Heads to the U.S.

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BrewDog’s Jim Watt and Martin Dickie, with the world’s strongest beer.

Thanks to a war among European brewing companies, it’s never been easier to catch a healthy beer buzz. Or get yourself totally sloshed. In November, BrewDog, a three-year-old Scottish microbrewery, released a new brand, dubbed Tactical Nuclear Penguin. The beer set a new record by weighing in at a scary 32% alcohol by volume (ABV), more than six times the strength of familiar domestic brands like Budweiser. As explained in a cheeky video on the company’s website (warning: the clip contains simulated penguin sex), the brewery was able to attain the high alcohol content by freezing the beer at a local ice cream factory, at temperatures as low as -6°C (21°F), for 21 days. Alcohol freezes at lower temperatures than water, and removing water from the solution increased the alcohol concentration.

 

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Admission Trends at European Business Schools

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The desire to become an entrepreneur, is up 25% from the previous year

From rising numbers of applicants to more students eyeing entrepreneurship and social responsibility, here are the key trends shaping Europe’s MBA programs
Javier Muñoz, admissions director at IESE in Barcelona, is looking to expand the school’s class size by adding a fourth stream to its full-time MBA. “Applications have been very strong this year,” Muñoz says.
The increase IESE is seeing in demand for MBA degrees is happening worldwide—and particularly benefiting European business schools. The QS World MBA Tour reported an overall 5% increase in attendance numbers in 2009 over the previous year, while most European B-schools have reported increases of 10% or more in their number of applications.
Peter Rafferty, MBA director at Vlerick Leuven Gent Management School in Belgium, has been able to double his class size in the past 12 months on the back of a 100% jump in applications. St. Gallen in Switzerland has seen a 100% growth in its part-time executive MBA program, alongside strong growth in its full-time MBA program—with applications coming from across Europe. And in the U.K., Philippa Hain of the London Business School’s admissions team also reports strong application numbers, while the lesser-known Westminster Business School has had to wait-list applicants for the first time for its full-time MBA, according to its admissions manager, Agata Mazurkiewicz.
What’s behind this resounding growth in demand for MBA studies at European schools?
REDIRECTING CAREERS
The financial crisis has certainly shaken out professionals in financial services, encouraging them to change career paths. Santiago Iniguez, dean of IE Business School, argues that “the MBA remains a transformational experience, a hub where participants can retrain.” Among 2009 attendees of the QS World MBA Tour in Europe, 18% came with a finance background, compared with 14% in 2008. The one-year duration of most European MBAs, combined with the fact that the schools tend to cater to a slightly older cohort of candidates than their U.S. counterparts, have made them quite attractive to people seeking new careers.
Career insecurity also has encouraged young professionals from a broad range of industries to seek an MBA as a safe haven, using the recession as a period to “reskill” and prepare for opportunities in the future. Usually MBA applications start to slacken at the beginning of an economic recovery. But in 2010 many young professionals have decided that to be equipped for a new business era, an MBA degree may be a prerequisite for success. As a result, applicant demand is more robust than at the same stage in previous business cycles. “Business remains the hottest ticket in higher education, with the widest career opportunities,” says IE’s Iniguez.
One trend in the past 12 months is especially noteworthy: A growing number of people appear to be rejecting traditional corporate career paths in favor of entrepreneurial pursuits. An MBA is an obvious way to jump-start that process. Asked their reasons for attending business school, 30% of attendees of the QS World MBA Tour identified a desire to become an entrepreneur, up from 25% the previous year. Many European B-schools have established strong reputations for fostering entrepreneurs or entrepreneurially-minded managers, including Cranfield, EM Lyon, IE, IESE, Imperial, Insead, LBS, Manchester, and RSM.
GOOD CITIZENS, TOO
Socially responsible careers are another objective that’s increasing in popularity, to the benefit of European schools that have built CSR into their curricula. Some 11% of QS World MBA Tour attendees expressed an interest in socially responsible careers, compared with just 6% a year ago. “A significant number of IE alumni are exploring business opportunities in fields such as biotechnology, renewable energies, or ‘green’ industries,” says the school’s Iniguez. “Today we live in a new business environment where business schools are challenged to prepare not just good financial engineers or management technicians, but primarily entrepreneurs who are at the same time good citizens.”
Another big change has been the proportion of international students at business schools who are actively looking to return home or develop careers in emerging markets. A few years ago, an international MBA was a route to a new life overseas—most commonly in the U.S. or Britain, which were the two most popular career destinations. Now, with tightening work permit requirements in the U.S., international MBAs are instead looking to return home to take advantage of burgeoning opportunities there.
Professor Mauro Guillen at the Wharton School in Philadelphia notes that “a higher percentage [of graduates], perhaps as many as two out of every three, are returning to work in their home countries, or in emerging markets, rather than staying in the U.S.” European business schools are capitalizing on easier visa requirements in their countries to attract international MBAs determined to stay and work abroad in their country of study.
At the same time, European business schools are appealing to “return-homers.” They are emphasizing their highly international student mix (at many, more than 90% of the students are international) and their ability to teach international business practices while providing an internationally dispersed alumni network. All of these factors can provide powerful career advantages for those seeking to exploit the rapid growth of China, South East Asia, Latin America, and other emerging economies.
Via BusinessWeek

From a rising number of applicants to more students eyeing entrepreneurship and social responsibility, here are the key trends shaping Europe’s MBA programs.

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Five Greatest Risks to the Future of the Euro Zone

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Anti-capitalist graffiti in Athens, Greece

First it was Greece. Then came Portugal and Spain, with Ireland and Italy not far behind. The financial crisis has driven up public debt in Europe’s common currency zone to such heights that many economists fear the euro could collapse.

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European Economy Unsettled by Debt Crisis

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A couple looking at a shop in Greece as the economy has suffered a major deficit crisis.

Governments in Athens, Madrid and Lisbon struggled on Friday to quell fears of a looming debt crisis in Europe that is pummeling the euro and rippling across global markets, as authorities vowed to impose fiscal austerity and plug their yawning budget deficits. The problem, however, is that investors don’t appear to believe them.

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Six Cultural Trends Not Saving The Planet

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India: fast food nation

Live and let live, right? We’ve all heard the phrase a million times, and it connotes that true-blue American sentiment of accomodation and freedom of choice. But what about when our choices are trashing the earth? Then it seems the only remedy is pointing out our own foibles again and again until we realize how damaging and destructive they are. Scanning the globe for recent trends we find a lot that seems to be going in the opposite direction of environmental protection. (Pics)

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SeedSummit Brings Europe’s Seed Investors Together

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I can see clearly now that I am well funded…
Yesterday some of Europe’s most influential and active seed/angel investors got together in London for a ’summit’ organised by Seedcamp, the pan European early stage startup program. We understand the morning of SeedSummit (press weren’t invited) was devoted to frank exchanges between the investors about the current stage of early stage seed funding in Europe, with the afternoon reserved for a more public showcase of Seedcamp startup pitches.
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