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.

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Jeremy Corbyn appoints Shami Chakrabarti to lead inquiry into Labour and antisemitism

“Labour is an anti-racist party to its core," says leader.

Jeremy Corbyn has announced plans for an independent inquiry into antisemitism in the Labour party.

The review – led by Shami Chakrabarti, the former director of the human rights campaign group Liberty – will consult with the Jewish community and other minority groups, and report back within two months.

Its vice chair will be the director of the Pears Institute for the Study of Anti-semitism, Professor David Feldman.

The move follows a week in which the party suspended Bradford MP Naz Shah and former London mayor Ken Livingstone, amid claims that both had made antisemitic remarks.

But Corbyn told the Guardian: “Labour is an anti-racist party to its core and has a long and proud history of standing against racism, including antisemitism. I have campaigned against racism all my life and the Jewish community has been at the heart of the Labour party and progressive politics in Britain for more than 100 years.”

He added that he would not see the results of next Thursday's local elections as a reflection of his leadership, and insisted that he would not be held to arbitrary measures of success.

“I’m keeping going, I was elected with a very large mandate and I have a huge responsibility to the people who elected me to this position," he said.

Jonn Elledge is the editor of the New Statesman's sister site CityMetric. He is on Twitter, far too much, as @JonnElledge.