Having completely failed investors at the most critical time in generations by comprehensively misjudging the credit risk of CDO's and other exotic structured instruments, the three major credit ratings agencies (CRA's) now seem to be overly anxious not to be accused of being asleep at the wheel with respect to the Eurozone sovereign debt crisis.
S&P on May 23rd changed its outlook on Italian public debt from stable to negative and all of the agencies seem to be trying to differentiate between different shades of "junk" in regard to Greece's debt.
In the case of sovereign debt the CRA's might want to think of a new category somewhere between investment grade and default which would be equivalent to the need for creditors - in most cases private sector banks - to seek a bail out from their respective domestic public sectors.
Mervyn King once observed that the world's major banks are "global in life but national in death" and this is really the overwhelming issue beneath the tip of the iceberg that seems to preoccupy most commentary on the EZ debt crisis. Should there be an ultimate unravelling of the duct tape that is holding together the "solutions" that have been hatched by the ECB and the enormous contingent of the smartest from Europe's business schools, then it will be the German, French, Swedish, and UK governments - to name just a few - that will have to clean up the mess. And that clean up will - despite all attempts to conceal it with smoke and mirrors - amount to yet another transfer of mistakes made by hapless bankers to the future generations of European taxpayers.
One supposed way out of this outcome would be for the EZ to become something like a United States of Europe with a federal guarantee provision for the ECB and mechanisms for fiscal transfers. The only problem with this pathway is that electorates across the more prosperous parts of Europe are unlikely to enable their elected officials to enact such a re-structuring of the EMU.
Ironically if they don't act together then as the troubled European banks "die nationally" as aptly characterized by Mervyn King, the outcome may not be very different from having the whole mess transferred to a federal EZ balance sheet.