Outlook: Credit agencies getting it right at last

Given that they performed so woefully in the run-up to the credit crisis, why should we take any notice of what the credit ratings agencies have to say about the sovereign debt crisis in the eurozone?

It would certainly suit those charged with coming up with a political solution to the question of what to do about Greece for the likes ofStandard & Poor's to support them in the way they once did the issuers of CDOs. But we ought to be grateful the credit ratings agencies are not prepared to play ball – Moody's, like S&P yesterday, has said the current proposal for rolling over Greece's debt would be a default even if Europe's banks volunteer to agree.

For one thing, it is no good for those who have been so critical of the role of credit ratings agencies during the crunch – and eurozone governments have been up there with the best of them – to complain now that they are on the wrong end of these more realistic assessments of debt and default.

For another, eurozone governments may not like what S&P had to say yesterday, but the rating agency's customers – those who pay it to assess the risk of borrowers not repaying what they owe – treat its views with the utmost seriousness. S&P's views – and those of its counterparts – matter because the markets think they matter.

And for yet another, it is very difficult to take issue with what S&P has to say. The crux of the French proposal for restructuring Greece's debts is that lenders would not be forced to accept the plan. Even leaving aside the question of the extent to which European banks are to be pressured into "volunteering" to accept losses on Greek holdings, the fact that losses are occurring is the text book definition of a default.

How could any self-respecting credit ratings agency fail to describe it as such?

The importance of the argument about default, by the way, is not so much the immediate impact on European banks of crystallising losses on Greek sovereign debt, but what might take place in the credit default swap (CDS) market, where the fear is of as yet unquantifiable losses for many issuers.

It was these contracts – effectively insurance policies that pay out to borrowers if the lender cannot – that caused so much trouble after the collapse of Lehman Brothers at the height of the credit crisis.

The prevailing view in the finance ministries of France and Germany, the other promoter of the voluntary haircut scheme, is that a technical default would not necessarily trigger demands for huge CDS pay-outs.

Isn't that just the sort of wishful thinking that saw eurozone policymakers insist for so long that Greece did not need a restructuring (or that Ireland and Portugal did not even need bailing out)?