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Banking

Abigail with attitude: Egan leaves egg on big raters’ faces

Barron’s magazine is a financial periodical targeted at the US retail investor. It is fascinating for those obsessed with markets. Barron’s has a large following, especially in America, and can move markets. As I pored over my copy on Sunday morning, I found an innocuous article entitled ‘Gloomy forecast for Europe’s banks’, tucked away at the back of the publication. This was an interview with Sean Egan, president of Egan-Jones Ratings.

It made for a sober breakfast. Philadelphia-based Egan -Jones has won respect for calls, ahead of better-known rivals, on companies such as CIT, Countrywide, General Motors, Lehman Brothers and MBIA. The firm’s research is paid for by investors, not issuers.

The scandal of the inherent conflict facing the major ratings agencies (their fees are paid by the issuers whom they rate) has not been resolved. The 2008 crisis revealed that the issuer-dependent agencies were slow and lumbering beasts.

Nothing has changed. In early July, Moody’s downgraded Portugal’s long-term debt by four notches to junk-bond status. To implement such a vertiginous cut so suddenly when problems have been in the public domain for at least a year is irresponsible. Investors were forced to dump the paper into a black hole as market-makers ran screaming for the hills.

Egan-Jones downgraded Portugal to junk last December, some months before the country asked for a bailout from the EU.

So Egan has a good track record. Unfortunately, he is pessimistic about the European sovereign debt crisis, opining: “Any default will lead to write-downs that will show the European banks as actual or near-zombies.”

Egan states that the tax base of the PIGS countries is too small to support their outstanding debt levels. They will default and bondholders could face 90% haircuts (much higher than the consensus 30% bandied about), he says.

Ultimately, the contagion will affect the European Central Bank itself, he adds. Egan points out that the European authorities are at a huge disadvantage compared with their US counterparts because there are so many parties to consult and placate. I highly commend the article to my readers. 


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