Do We Really Need the Rating Agencies?

RCM ^ | 06/16/2014 | By Desmond Lachman

[SeekAndFind]

One has to be struck by the recent slew of rating agency credit upgrades for European sovereign bonds. Since the start of the year, undaunted by the marked deterioration in European political and economic fundamentals, the rating agencies have sheepishly followed the market's more favorable attitude towards Europe by providing the European countries with improved bond ratings. This has to raise question anew as to whether the rating agencies serve any useful purpose. Similarly it has to raise questions as to whether the rating agencies continue to amplify market movements in a pro-cyclical manner.

Since the start of the year, the rating agencies have been falling over themselves to reverse their earlier wave of severe credit rating downgrades in the midst of the Euro-zone crisis. From Slovenia to Spain and from Greece to Portugal, one rating upgrade has followed another in quick succession. This would all be well and good if those upgrades reflected improvements in those countries' underlying debt fundamentals. After all, it is the primary responsibility of the rating agencies to provide an objective assessment to market participants of the rated country's probability of defaulting on its debt.

The trouble with this most recent round of European sovereign rating upgrades is that it seems to be simply following the market's liquidity-driven improved assessment of Europe rather than to be making an objective assessment of the country's economic and political fundamentals. At the political level, it would seem strange for rating agency upgrades to be occurring at a time that the political center across most of Europe seems to be crumbling.

This political crumbling is underscored by the fact that in last month's European parliamentary elections 30 percent of the electorate voted for parties openly hostile to the European Union.

[Fido969]

Yikes.

[Wyatt's Torch]

They would serve a purpose...if they weren’t so open to political pressure and, well, poor analysis. I see Moody’s and S&P rating on our corporate debt prior to their publication so we can “check”. They are often rife with errors and poor understanding of company and market fundamentals. They need to upgrade their talent to make their reports useful.

[RIghtwardHo]

Exactly!