Who Rates the Rating Agencies

by Manshu on May 22, 2009

in Opinion

The big story today was S&P’s warning to UK about their high debt levels and how the UK could lose its AAA rating, if their debt continues to rise.

From the FT:

Standard and Poor’s, the credit ratings agency, warned that the medium-term outlook on the UK’s triple A rating on its debt was now “negative” rather than “stable” for the first time since it started analysing British public finances in 1978.

Though the agency lowered its outlook to negative, it affirmed its “AAA” long-term and “A-1+” short-term sovereign credit ratings.

S&P based its warning on a forecast that UK net government debt risked approaching 100 per cent of national income and staying at that level. “A government debt burden of that level, if sustained, would in Standard & Poor’s view be incompatible with a ‘AAA’ rating,” the agency said.

What surprises me about this story is how big it became. That shows that people are still interested in what the rating agencies say. I am not sure if they have ever predicted anything that has proven right. They rated all that junk – AAA, and almost always act on events after the fact.

And yet they have some semblance of credibility. I am not sure if this can be attributed to people having short term memories or just that there is really nothing else to go by. You can’t expect everyone to do their own research before investing and you have to rely on someone. And they are the only one we have right now.

I think as part of their annual statements they should present a summary of the major decisions they took during the year and how they turned out. It should be like a hit and miss summary that gives investors an idea how wrong or right these agencies have been.

There is no one rating the rating agencies and that looks like a big hole in the current system.

{ 1 comment… read it below or add one }

ctreit May 22, 2009 at 3:52 pm

That’s a good question. There are many more. For example, where is the real competition if less than a handful rating agencies are authorized to issue an officially recognized credit rating? How come these credit ratings are still officially recognized?

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