Downgrades By Ratings Agencies Have Been Defied By Investors As Markets In Downgraded Countries Continue To Rally

Monday, September 17, 2012 07:32
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Downgrades By Ratings Agencies Have Been Defied By Investors As Markets In Downgraded Countries Continue To Rally

Tags: bonds | markets | S&P

The downgrade of French debt by Standard & Poors eight months ago has made France more creditworthy. Investors have decided the credit analysis conducted by many ratings firms is irrelevant.

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The downgrades reduced borrowing costs—including those for the US after its downgrade—and bond yields often move in the opposite direction after a downgrade.
 
The ratings themselves are losing credibility as a result since the performance on the debt of downgraded countries has only improved since the downgrades were made.
 
The basis for the downgrade of France’s debt in January of 2012 was Europe’s then inability to stem its sovereign debt crisis and that distressed countries might lose access to credit markets for the funding needed to survive.
 
A shift from strict austerity to adding growth measures along with prudent financial restructuring has caused costs to fall substantially.
 
In defense of the ratings, Moody’s Investors Service in London said that the ratings serve investors by evaluating a number of critical fundamental indicators for creditworthiness.
 
The economic strength of issuers, institutional strength, financial strength, and ability to weather event risk are all elements of the creditworthiness of sovereigns.
 
Former Standard & Poors employees say the ratings are needed by investors even if people do not believe in them. Warren Buffett stated after S&P downgraded US debt to AA+ that the credit rating of the US should be AAAA.
 
Buffett is the largest shareholder of Moody’s. Treasuries also rallied substantially after the downgrade, advancing about 5.5% since August of 2011.
 
Ratings agencies are threatening still another downgrade of US debt if Congress does nothing to reduce the debt-to0gross-domestic-product ratio during the next budget negotiations.
 
Others say the factors in ratings decisions are not transparent, weakening the impact of the ratings on markets. The ratings may not be consistent with other calls the ratings agencies are making and so, may not be consistently reflective of the tasks a ratings agency is expected to fulfill.

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