LONDON Rating agencies are falling over each other to upgrade the euro zone's crisis countries, but with debt levels in most still rising and growth and reforms slow, the question is whether the new-found optimism has swung too far.
Moody's, Standard and Poor's and Fitch, the so-called "big three" rating firms, fed market panic during the euro crisis by repeatedly slashing what were supposed to be long-term views on the bloc's troubled members' credit worthiness.
Ratings matter because investors often use them as a benchmark for what they can and cannot buy. They are meant to shut out the noise of market volatility but during both the euro zone and late 1990's Asian crises appeared to do the opposite.
Greece's rating was cut by a dozen notches as it went from being an A-grade sovereign to default in less than three years and Ireland was a top-rated AAA country just a year before it had to be bailed out by the EU and IMF.
However, following the remarkable rally in euro zone financial markets over the last two years, the tide looks to have finally turned.
Moody's has lifted Ireland's rating twice this year by a total of 3 notches, a hefty move for a country just out of an EU/IMF bailout program and with debt still at an all time high. [ID:nL6N0O24S1]
Spain and Portugal have either been upgraded or had their outlooks raised by all the "big three" agencies, while Fitch recently lifted Italy's outlook and on Friday upgraded the original euro zone sinner, Greece. [ID:nL6N0NH3HU]
"We have seen the bottom (of the downgrade cycle) I would think. But we are not joining into the overshooting that we are seeing in the market right now," said Moritz Kraemer, S&P's head of European sovereign ratings.
Some would argue they are though. Spain was upgraded by S&P on Friday, leaving it just one notch below Mexico, an economy of similar size but with less than half its debt and expected to see triple it's growth this year.
Similarly, in 2010, the last time Moody's moved Ireland to its recently upgraded Baa1, the country's debt to GDP was 25 percent lower.
Despite the euphoria in financial markets the fundamentals are not pretty anywhere.
Growth remains anemic and European Commission forecasts published this month showed Greek debt is expected to keep rising to 177.2 percent of GDP this year, Italy's to 135.2 percent, Cyprus's to 122.2 percent and Spain's to 100.2 percent.
Among the crisis-hit eurozone countries, only Ireland and Portugal are forecast to see falls, but in both countries debt will still be more than 120 percent of GDP. Dublin is struggling with one of the biggest fiscal deficits in all of Europe.
The sudden bout of optimism has therefore reignited the debate around ratings, and whether rather than being an anchor for erratic financial markets, they are ultimately driven by them because of the focus on government borrowing costs.
S&P's Kraemer, who at the height of the euro zone crisis threatened to downgrade the entire euro zone at once, stressed moves both before and now after the crisis were not a reaction to bond yields.
He said in S&P's analysis, they account for just under 5 percent of an overall rating and that the firm takes a multi-year average to smooth out crisis spikes.
Moody's and Fitch take a slightly different approach. They say they make their assessments purely on what they expect the cost of debt to be in the future.
"It's a judgment call," said Ed Parker, one of Fitch's top euro zone sovereign analysts. "At some point when you have big increases in market interest rates then that does itself become a fundamental."
"If it looks as if those high levels of interest are going to persist and also growth is going to be weak, that will feed through via the sustainability of a country's debt burden."
All of the main rating firms, with the exception of the smaller and more steady DBRS, made well over 50 notches worth of downgrades during the euro zone crisis.
None of them feel they over-reacted. Fitch is the only one to have changed its top European analyst and that was because he left to join a hedge fund.
Asked whether Moody's, which still has top market performer Portugal at a '"junk" grade rating, had been too pessimistic, Bart Oosterveld the firm's Managing Director of Sovereigns simply replied, "No".
Investors, meanwhile, are divided in their opinion.
Some chastise the agencies for lagging what financial markets were usually screaming for months. Others though stress the unpredictable political wrangling that went on during the euro crisis made the bloc's troubles almost impossible to predict.
Martin Harvey, a fixed income manager with Threadneedle Investments who holds euro zone debt, said Portugal was a particularly good example.
"At the time when we had had an actual default on Greek debt, Portugal looked like the next most stressed... so given that was the scale, they were treated relatively fairly. But it is also fair they are now rewarded on the upside for the improvements going on."
However, he warned there were signs that ratings firms may be getting caught up in some of the market's over-enthusiasm.
"The optimism on Ireland is somewhat puzzling to me," Harvey said referring to Dublin's high debt and large deficit. "But that also goes for the market pricing of their debt as well as their rating."
(Reporting by Marc Jones; Editing by Peter Graff)