ALPBACH, Austria (MNI) – If Eurobonds are issued in the form
apparently envisaged at present, they would be rated as junk bonds,
Moritz Kraemer, the head of European sovereign ratings at Standard &
Poor’s, indicated Saturday.

Speaking at an annual forum here, Kraemer said that the rating of a
commonly issued Eurozone security “depends on how the Eurobond would be
structured.”

Current thinking is that such a bond would be like Germany’s Jumbo
bonds, issued jointly by federal states that then guarantee their own
share and no more, he said.

“If the Eurobond is structured like this…the answer’s very
simple: if we have a Eurobond where Germany guarantees 27%, France 20%
and Greece 2%, then the rating of this Eurobond would be CC, which is
the rating of Greece,” Kraemer warned. It would be “the weakest link
approach,” he said.

“Now, possibly this will be structured a different way — I don’t
know,” he added, noting that S&P’s job would be to rate such a bond
after it was created, not advise or negotiate with the EU about it
beforehand. “We are strictly not involved in any of these
conversations.”

The creation of a possible Eurobond is a highly controversial issue
amidst the rising market tension of the Eurozone debt crisis. Germany
and some of its northern neighbors are steadfastly opposed to it, while
some of the southern EMU states believe it is the best — perhaps the
only — way forward. Italy’s Economy Minister Giulio Tremonti said over
the weekend that a Eurobond was an “absolute necessity,” according to
Italian media reports.

Kraemer said S&P thinks “a lot” about how to minimize the market
consequences of its rating actions, “because we don’t want to rattle the
markets. We want to be like a central bank, we want to be as boring and
as predictable as possible. We don’t want to surprise.”

Transparent, publicly available ratings criteria are one way to
accomplish this, he said. Moreover, the outlooks issued by S&P are a
clear indication of what could happen to a given sovereign’s rating, he
said.

“Outlooks tell the investor, if you have a negative outlook, it’s
our assessment that in the sort of next year or so, there’s at least a
one-in-three chance that the rating would go down. And then if it
becomes more acute, we have credit watch, which is a more short-term
moniker, where we say that there’s at least a one-in-two chance that the
rating would go down in the next three months,” he said.

Indeed, the indications provided in the run-up to a rating change
are such that in the case of the U.S. downgrade in August, any attentive
observer “could not have possibly been surprised by this action, because
it was as clearly as possible flagged,” he asserted.

The way in which S&P attempts to communicate its possible future
actions is akin to the practice of a central bank when it says it has a
tightening or other bias, Kraemer observed.

“That’s how we try to minimize the consequence, other than trying
to publish outside market hours,” he added.

With regard to establishing a European rating agency, Kraemer said,
“there seems to be fairly little movement.” He noted that, “one of the
problems may be that the regulation that the EU introduced last year
actually raises the barrier of entry significantly. So this is one of
the probably unforeseen consequences — that it’s harder actually for
new firms to get into the market.”

There is a German-led group currently attempting to establish a
privately funded nonprofit rating agency to address the shortcomings of
the current system. It is led by Roland Berger, a consulting group, with
support from Deutsche Boerse, the German state of Hesse, and the
Frankfurt Main Finance Association.

Kraemer said it is a positive thing if there is “a multitude of
opinions,” though he said it is already the case that the leading three
agencies don’t usually agree. “So there are different opinions, and if
there’s another opinion, that’s fine, and let the markets and the
investors decide which ratings they put the most trust in.”

–Frankfurt bureau tel.: +49-173-3156588. Email: dbarwick@marketnews.com

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