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Financial Times Deutschland, Germany

American Credit Rating Agencies Lose Influence

 

"The eurozone is in danger of being downgraded, but panic has yet to break out. The big credit ratings agencies are themselves to blame. Confidence in their professionalism is waning - and their messages are hardly necessary."

 

EDITORIAL

 

Translated By Stephanie Martin

 

December 6, 2011

 

Germany - Financial Times Deutschland - Original Article (German)

Tuesday’s experience with the powerful rating agencies permitted us to observe an interesting phenomenon. Standard and Poor’s was already threatening a possible downgrade of “AAA” countries in the eurozone (yes, Germany as well!) and of the European bailout fund along with it. And what happens? Nothing - or at least very little. The markets merely signal: We already know all that. And even Europe’s politicians, peeved as they are - are shrugging it off: yeah, yeah, the rating agencies - they’re just one voice among many. At most, S&P's threat is an additional incentive for the upcoming Euro summit. Oh, right.

 

So what’s going on here with the rating agencies? Does bad news have less of an impact now that the big euro-apocalypse is predicted daily? Or is the oligopoly of rating giants discrediting itself because their operating methods are increasingly met with skepticism?

 

Both are the case.

 

The insights investors might gain from the pronouncements of the rating agencies are modest at best. The rating verdicts are indeed influential - in part because they were consciously imbued with this power by regulatory authorities and central banks. But their messages are hardly needed. Particularly downgrades, actual and threatened, don’t really shock the markets if the worst has already been taken into account.  

 

And since the U.S. was downgraded, no one really believes that a downgrade must be associated with higher interest rates for a debtor country. In fact, U.S. interest rates are now even lower than they were during “AAA” times. There is a simple explanation: investment decisions are always first and foremost a question of alternatives - not a combination of letters.

 

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For the rating agencies, however, the euro crisis could develop into a one within their own industry. And for that to happen, political responses like tighter regulation or even the creation of a European rating agency aren't even necessary. The circumstances alone - like the way in which information about a possible downgrade of eurozone countries has been leaked - are enough to undermine the confidence in the professionalism of rating agencies.

 

In this at least, S&P's is largely beyond reproach. The agency is required to inform governments of a rating action twelve hours before it is made public. If frustrated government representatives increasingly leak this information to the press, here again, the reputation of the agency will gradually diminish.  

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