Italy...If You Can't Beat Rating Agencies, Raid 'Em

Italy is often caricatured as a relatively lawless, cult of personality-type of republic in contrast to supposedly more enlightened states in the Eurozone. Certainly Silvio Berlusconi's antics don't inspire confidence among many outside of the country. This latest caper is certainly not one to assuage those concerned about the arbitrary deployment of the rule of law there.

To be sure, there is little love lost between Europe's powers-that-be and credit rating agencies--not the least because the big 'uns are American concerns passing judgement on the financial health of various European institutions. In a fit of pique Nicolas Sarkozy proposed the creation of a Europe-only credit rating agency, though this interjection was rapidly forgotten due to the obvious credibility issues associated with devising your own credit rating agency specifically to give your buddies better ratings. Not that S&P, Moody's and Fitch's are paragons of accuracy and honest opinion, but there are even worse conflicts of interest possible in this hotly contested activity.

With that avenue firmly closed off, it appears that the Italians have taken to mafioso-inspired tactics straight out of Mario Puzo novels. With Italy's borrowing costs soaring to new heights on a weekly basis and even worse being threatened, its authorities have now raided the offices of S&P and Moody's. Call it the international political economy equivalent of waking up next to a dead horse's head. Coincidence? I think not...

Italian prosecutors have seized documents at the offices of rating agencies Moody's and Standard & Poor's in a probe over suspected "anomalous" fluctuations in Italian share prices, a prosecutor said on Thursday. The measure is aimed at "verifying whether these agencies respect regulations as they carry out their work," Carlo Maria Capistro, who heads the prosecutors' office in the southern town of Trani which is leading the probe, told Reuters.

The documents were seized at the Milan offices of the two agencies on Wednesday, he said, adding that prosecutors had also asked Italian market regulator Consob to provide documents relating to their registration in Italy.

S&P in Italy said in a statement it believed the probe was "groundless". "We strongly defend our work, our reputation and that of our analysts," it said. Moody's said it "takes its responsibilities surrounding the dissemination of market sensitive information very seriously and is cooperating with the authorities."

Unsurprisingly and quite directly, the complaints which prompted the raids surround supposedly loose talk about contagion and downgrades:

The Trani prosecutors have opened two probes -- one for each rating agency -- after a complaint by two consumer groups over the impact of their reports about Italy on Milan stock prices. The first complaint was filed against Moody's after it published a report in May 2010 about the risk of contagion for Italian banks from the Greek crisis. A second complaint filed in May this year targeted Standard & Poor's after it threatened to downgrade Italy's credit rating because of its huge public debt.

The prosecutors are also investigating whether any crimes were committed during a sell-off in Italian assets on July 8 and July 11 as fears spread that the euro zone's third largest economy is being sucked into the widening debt crisis.

One of the consumer groups behind the complaints said the probe was aimed at finding out whether the market's sharp drop was due to a "precise scheme by hedge funds and other unidentified players that could be linked to the negative comments about Italian public finances by the rating agencies." [Italian securities regulator] Consob last month summoned Moody's and S&P for meetings and urged them not to release their statements during market hours.

From where I stand it looks like you've been Khodorkovskied, American credit rating agencies. If that doesn't send them a message Italian style--horse's heads in bed and all that--I don't know what will. Mob rule-ish antics may not be more developmental than neoliberalism, but it's definitely interesting when the two collide.

Wouldja like one A or two? And Uncle Sam should be cast as Fredo. We all know what became of him.