Italy’s legal system, already deeply unfriendly to business, has sunk to a new low this week. In the town of Trani, prosecutors requested to charge five Standard & Poor’s officials with “aggravated and continuous market abuse” because they announced the reasons for S&P’s downgrade on Italian sovereign debt three days after the announcement of the downgrade itself in May 2011.
Prosecutors claim this delay created unnecessary market volatility and investor flight. But it seems more like a case of shooting the messenger. It’s no secret European governments revile the credit raters for communicating to markets Europe has been living beyond its means for quite some time. Look no further than the bombastic rhetoric against the credit raters and the European Commission’s proposal to require European Union approval of credit rating methodologies -- a ploy to make the raters a puppet of bankrupt governments. Like other European countries, Italy wanted to keep its unsustainable finances a secret. Now, Italy wants a chance to go after the messenger.
This after last month’s manslaughter conviction of seven Italian scientists who were ruled guilty of not accurately predicting the severity of a deadly earthquake in 2009. The ruling was scapegoating at its finest -- using the courts to cover up the Italian government's failure to adequately prepare for the disaster.
Unsurprisingly, the World Bank ranks Italy dead last among OECD high-income countries in the integrity of its legal system. Ironically, the poor nature of Italian courts is partly a cause of the stagnation in Italian entrepreneurial activity -- and subsequently, credit downgrades. When businesses can’t trust the legal system to act in a consistent manner, they lose a fundamental principle underpinning the functioning of the market economy: protection of property rights.
Attacking the credit raters will lead only to further downgrades and even more fleeing investors.