Nobody cares if a country's credit rating gets cut, so why listen to the agencies at all?

Credit ratings agencies are wrong, confused and frequently completely ignored

Bloomberg reported on a new study yesterday evening, showing the effects of a credit rating agency cutting its rating of a sovereign's debt is not what many expect it to be. 

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for S&P. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.

The British experience is one of the key case studies in the piece, and we are actually one of the better examples of the ability of ratings agencies to move the market. On the chart below, the first orange flag is when Moody's said that the UK should implement severe cuts to keep it's Aaa rating, and the second is when our Aaa rating was put on negative outlook. Bad news would be expected to move the line up:

Yup, the markets pretty much ignored Moody's. Not quite as embarrasing as the French experience. In this case, the first orange flag is Standard and Poor's reaffirming the country's AAA rating and the other three are, respectively, a warning of a downgrade, a downgrade, and being put on negative outlook:

So the good news was followed by a steady rise in the spread, and the bad news was followed by sharp drops. Gee, I sure hope my country doesn't get downgraded by a ratings agency!

Not that any of this news is particularly new. Bloomberg even cite an IMF study from January which came to much the same conclusion:

In a January analysis of Moody’s rating changes, researchers at the IMF used credit derivatives to show that prices moved in the expected direction 45 percent of the time for developed countries and 51 percent for emerging economies. For outlook changes, the ratios were 67 percent and 63 percent.

The IMF study, by going into a bit more detail, reveals a bit of what's going on. Notice that the effect of outlook changes was significantly stronger than the effects of actual downgrades. As Felix Salmon points out, one of the strengths of markets is that they are very good at pricing in future events. When an outlook changes, a downgrade is likely to follow, and so a lot of the expected spike in yields happens before the actual downgrade.

But the other reason why the ratings agencies are ignored so often is that they simply aren't very good, particularly when dealing with countries like the UK and US, which control their own currencies. As Jonathan Portes has written time and again:

When it comes to rating sovereign debt, they simply do not know what they are talking about; worse than that, they do not even understand what their own credit ratings mean.

Ratings agencies are frequently ignored because it is nigh-on impossible to parse their ratings into actual claims. They aren't discussing increased risk of default; and nor are they discussing the risk of investing in gilts, because what they cut ratings for is frequently good for gilts (low growth, for instance, makes gilts a better deal). And the Bloomberg piece even closes with a quote which demonstrates the agencies' own cluelessness:

"The U.K. shouldn’t care at all what its rating is,” says Vincent Truglia, managing director of New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody’s. “A rating is not what you’re supposed to be interested in. You’re supposed to be interested in the right public policy.”

If the UK shouldn't care about its own rating, then the fact that Moody's issues ratings phrased as guidance to governments – like the warning in 2010 that the UK needed to implement "severe cuts" to maintain its Aaa rating  – is very strange indeed. Ultimately, Truglia is just trying to shift the blame for the disastrous outcomes caused by policies his organisation recommended and threatened governments into implementing.

Credit ratings agencies: Falling over all the time? Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Christopher Furlong/Getty Images
Show Hide image

Want to know how you really behave as a doctor? Watch yourself on video

There is nothing quite like watching oneself at work to spur development – and videos can help us understand patients, too.

One of the most useful tools I have as a GP trainer is my video camera. Periodically, and always with patients’ permission, I place it in the corner of my registrar’s room. We then look through their consultations together during a tutorial.

There is nothing quite like watching oneself at work to spur development. One of my trainees – a lovely guy called Nick – was appalled to find that he wheeled his chair closer and closer to the patient as he narrowed down the diagnosis with a series of questions. It was entirely unconscious, but somewhat intimidating, and he never repeated it once he’d seen the recording. Whether it’s spending half the consultation staring at the computer screen, or slipping into baffling technospeak, or parroting “OK” after every comment a patient makes, we all have unhelpful mannerisms of which we are blithely unaware.

Videos are a great way of understanding how patients communicate, too. Another registrar, Anthony, had spent several years as a rheumatologist before switching to general practice, so when consulted by Yvette he felt on familiar ground. She began by saying she thought she had carpal tunnel syndrome. Anthony confirmed the diagnosis with some clinical tests, then went on to establish the impact it was having on Yvette’s life. Her sleep was disturbed every night, and she was no longer able to pick up and carry her young children. Her desperation for a swift cure came across loud and clear.

The consultation then ran into difficulty. There are three things that can help CTS: wrist splints, steroid injections and surgery to release the nerve. Splints are usually the preferred first option because they carry no risk of complications, and are inexpensive to the NHS. We watched as Anthony tried to explain this. Yvette kept raising objections, and even though Anthony did his best to address her concerns, it was clear she remained unconvinced.

The problem for Anthony, as for many doctors, is that much medical training still reflects an era when patients relied heavily on professionals for health information. Today, most will have consulted with Dr Google before presenting to their GP. Sometimes this will have stoked unfounded fears – pretty much any symptom just might be an indication of cancer – and our task then is to put things in proper context. But frequently, as with Yvette, patients have not only worked out what is wrong, they also have firm ideas what to do about it.

We played the video through again, and I highlighted the numerous subtle cues that Yvette had offered. Like many patients, she was reticent about stating outright what she wanted, but the information was there in what she did and didn’t say, and in how she responded to Anthony’s suggestions. By the time we’d finished analysing their exchanges, Anthony could see that Yvette had already decided against splints as being too cumbersome and taking too long to work. For her, a steroid injection was the quickest and surest way to obtain relief.

Competing considerations must be weighed in any “shared” decision between a doctor and patient. Autonomy – the ability for a patient to determine their own care – is of prime importance, but it isn’t unrestricted. The balance between doing good and doing harm, of which doctors sometimes have a far clearer appreciation, has to be factored in. Then there are questions of equity and fairness: within a finite NHS budget, doctors have a duty to prioritise the most cost-effective treatments. For the NHS and for Yvette, going straight for surgery wouldn’t have been right – nor did she want it – but a steroid injection is both low-cost and low-risk, and Anthony could see he’d missed the chance to maximise her autonomy.

The lessons he learned from the video had a powerful impact on him, and from that day on he became much more adept at achieving truly shared decisions with his patients.

This article first appeared in the 01 October 2015 issue of the New Statesman, The Tory tide