Home Do we listen to the ratings agencies?

Do we listen to the ratings agencies?

Moody’s and Fitch are the latest to throw in their views of the US debt situation, and were the first to come out after the deal has been announced. Moody’s downgraded the outlook to negative, but not as negative as S&P were whilst the debt situation was still to be resolved.  

Moody’s state that a decision on the rating could be made in two years, or “considerably sooner”.   Its concern lies with the fact that this is a “first step” in adjusting to the challenges that the US faces.   The question is, would a downgrade matter that much?

Guest post by  FxPro

The main criticism of ratings agencies is that they are merely telling us what we should already know, given that, for sovereigns, their assessment is based on publically available information. The trouble is that much of the financial system is tied to such ratings in terms of asset allocation choices and collateral quality.   From this angle, it’s perfectly feasible that the US could see a downgrade from one of the agencies and there would be no material impact, given that a lot of mandates choose to take the views of a selection of agencies, rather than relying solely on one.

But a downgrade from triple-A status from at least one of the major agencies still appears more likely than not from here.   The deal announced over the weekend and finalised late Tuesday still fails to tackle the debt situation head on.   Instead, there is a reliance on another committee to come up with a plan (Obama ignored the recommendation of the last one). The problem is that the closer we get to the US elections, the less likely it is that agreement will be reached to put the debt/GDP ratio on a sustainable downward path.   By the time such a downgrade comes through, the impact on the dollar and bond markets will likely be minimal. After all, we will have had plenty of warning.

Simon Smith

Chief Economist


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