Behind all too many of market moves in government debt of late has been a report from one of the major credit ratings agencies. S&P is the biggest and arguably the most influential, fast followed by Moody's Investor Service and then their smaller rival, Fitch Ratings. In national capitals, they are alternately vilified by politicians or held out as just arbiters for denouncing government profligacy.
Yet there is an overwhelming irony in their new-found prominence. These are the same firms that many blame as prime instigators of the 2007-2008 credit crisis for freely giving out top ratings to ultimately worthless structured mortgage products, allowing the credit bubble to form. Now they sit in judgment of the countries that had to ruin their public balance sheets to prevent financial collapse by saving the banks shattered by those bad instruments once blessed by the agencies.
"The ratings agencies failed the world economy in spades in the past," said Lord Peter Levene, chairman of the Lloyd's of London insurance market and a former senior adviser to the British finance ministry.
"Their track record has not exactly been stellar."The argument seems to be that because the ratings agencies all "missed" the financial collapse in rating junk financial instruments as AAA, then their credibility in this matter is nil. I don't follow this line of reasoning for a couple of reasons:
- The main issue that people seem to have with the credit rating agencies is that they waited too long to warn the investing public about the looming financial catastrophe that struck in 2007-2008 and issue downgrades. Shouldn't those people now be applauding these same agencies for trying to correct their failures by getting out ahead of possible new problems?
- If credit rating agencies tend to overrate financial instruments, an assumption that seems to underlie the argument, then shouldn't people take it very seriously when an agency actually does issue a downgrade?
You can't have it both ways. You can't simultaneously decry the agencies for missing the financial collapse in 2007-2008 and then point at that incompetence as a criticism for downgrading a financial instrument that everyone agrees is in trouble.