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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  1. ‘Screw’ the rating agencies and think for oneself. They gave the housing mortgages their AAA and everyone simply believed, look where that got us. Are these guys geniuses and should we allow them to sway the economics of the world. Money managers are paid to do their due diligence one would think.

  2. We certainly need more rating agencies to have a more balanced pictures. Indeed, they failed on the mortgages, but their strength increased. Funny old world!

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  5. The rating agencies should start with rating themselves I think.

    They’re so subjective in their assessments, and timings, their rating assessment is usually redundant by the time they’ve made it. If Greece, then why not the US? They’ve given so many ‘warnings’ they’re going to cut the US ratings, yet they didn’t do it while those ‘congresskids’ were throwing their babies out with the bath water and nearly bringing the world’s economy to its knees in the process. Indeed, one of the agencies was saying last week that, ‘even if congress didn’t agree a budget, and even if they defaulted on their debts, as long as it wasn’t a specific type of default (I’ve forgotten the mumbo jumbo they were spewing then), that the agency wouldn’t cut the US’s rating! Now the US has come up with a ‘barely credible’ plan to try and improve things, one of them has allegedly decided to cut the country’s ratings, after the market closes today.

    If I had any say in the matter, I’d cut the ratings agencies themselves!

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