Sunday 13 December 2009

Blaming ratings agencies clouds real issues

The conundrum facing the three major ratings agencies – Fitch, Moody’s and Standard & Poor’s (S&P) – has always been that if they don’t adjust their credit ratings for a borrower soon enough, they are blamed for anything that happens in the meantime.

If the borrower defaults and the agency’s rating indicated that the likelihood was low, investors tend to blame the agency for not foreseeing problems.

This is obviously a shortcoming in the way investors and markets interpret ratings in the first place. A rating merely indicates the likelihood of a default. But an “AAA”-rated borrower can default, just as a C-rated borrower might not.

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