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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Guns and bullets and nothing more: The Syrian Kurds fighting Isis

They are the US-led coalition's main ally in the fight against Isis, but as Turkey keeps bombing them, the sense of betrayal is growing.

A sense of a betrayal pervaded the funeral, giving an angry edge to the mourners’ grief. The Kurds were used to the Turks killing their people. It was almost expected. What was different in their attitude to the killing of the 14 men and women buried that hot afternoon in the cemetery at Derik, among 20 fighters killed by Turkish air strikes just three days earlier, was that it had occurred under the watchful auspices of the Syrian Kurds’ big ally: America.

So when a US armoured patrol arrived at the edge of the cemetery in northern Syria, the American troops had been met with sullen stares and silence. I watched Aldar Khalil, one of the most influential advisers with the local Syrian Kurdish administration, approach the US army officer while a cordon of armed YPG fighters surrounded the patrol to keep civilians away.

“I told the American officer how angry people felt,” he told me afterwards, “and advised them that as soon as they had achieved what they wanted to at the funeral they should go. Emotions are high. People expected more.”

The air strikes had been far more significant than anything previously visited by the Turks on the YPG, the Syrian Kurd fighting group that has become the Americans’ primary ally in the forthcoming battle to capture the city of Raqqa from Isis. Operations to shape the battlefield around the militants’ capital are ongoing, and some sections of the front YPG units, the mainstay of the anti-Isis alliance, are now less than four kilometres from the outskirts of Raqqa.

However, the entire operation was thrown into jeopardy early on the morning of 25 April, just days before US officials confirmed that President Donald Trump had authorised the direct supply of weapons to the YPG. Turkish jets repeatedly bombed the YPG’s main command centre on Qarachok Mountain, just above the small town of Derik, destroying ammunition stocks, a communications centre and accommodation blocks. The dead included Mohammed Khalil, a top commander involved in planning the Raqqa operation.

The attack immediately drove a wedge between US troops and the Syrian Kurds, who felt they had been knowingly betrayed by the United States, which had acted as the YPG’s ally in the fight for Raqqa with the one hand while allowing its fellow Nato and coalition member Turkey to stab the YPG in the back with the other.

“There were a couple of days after the Qarachok strikes when several of our leading commanders, and many of our people, put on the pressure to withdraw our forces from the Raqqa front altogether and send them to protect our borders with Turkey,” Khalil, the Syrian Kurd adviser, told me. “They wanted to stop the Raqqa operation. We had to explain very carefully that this was [the Turkish president] Erdogan’s goal, and to persuade them to continue.”

Senior YPG commanders suffered deep personal losses in the Turkish air strikes. Among the mourners at Derik was ­Rojda Felat, a joint commander of the overall Raqqa operation. Standing beside the grave of Jiyan Ahmed, one of her closest friends, she clasped a portrait of the dead woman in her hands.

“She survived fighting Da’esh [Isis] in Kobane, in Tal Hamis and Manbij,” Felat said. “She survived all that, only to be killed by a Turkish jet.”

Later, illustrating the fragile contradictions of the coalition’s alliances, Felat explained that she had gone to sleep in the early hours of 25 April, after finishing a series of late-night planning meetings with British and US officers at the forward headquarters she shares with them on the north side of Lake Assad, Syria’s largest lake, when word of the air strikes came through.

“It was very clear to me that the Americans I was with had not known about the air strikes,” said Felat, 35, a legendary figure among Syria’s Kurds whose role models include Napoleon and the socialist revolutionary Rosa Luxemburg. “They could see how upset and angry I was to learn in an instant that so many friends had been killed, and the Americans dealt with that compassionately. I was extremely distressed, to say the least,” she added, looking away.

Within a few hours of the strikes, Felat was on a US helicopter alongside US officers flown to Qarachok to assess the damage in a very public display of US-YPG solidarity.

The Americans were quick to try to mitigate the damage to their Kurdish allies. A further 250 US troops were sent into Syria to run observation patrols along the Syria-Turkey border in an attempt to de-escalate the tension, bringing the number of US troops there to more than 1,200. In addition, US weapons consignments to the Syrian Kurds increased “manifold” in a matter of days, Felat said.

Yet these measures are unlikely to stop the fallout from a strategy – that of arming the Syrian Kurds – which risks broadening Turkey’s overall conflict with the YPG, unless certain crucial political objectives are attained parallel to the push on Raqqa.

Turkey, at present regarded as a mercurial and mendacious “frenemy” by Western coalition commanders, perceives the YPG as a terrorist organisation that is an extension of its arch-enemy the PKK, a left-wing group demanding greater auton­omy within Turkey. Hence Ankara’s deep concern that the YPG’s growing power in Syria will strengthen the PKK inside Turkey. The Turks would rather their own proxies in Syria – an unattractive hotchpotch of Syrian Islamist groups mistrusted by the West – reaped the rewards for the capture of Raqqa than the YPG.

Although US commanders find the YPG more reliable and militarily effective than the Turkish-backed Islamist groups, the Syrian Kurds are a non-state actor, a definition that ensures B-grade status in the cut and thrust of foreign policy. Nevertheless, recalling the painful lesson of 2003 – that military success is impotent unless it serves a political vision – the US should be devoting energy to imposing conditions on the supply of arms to the YPG as a way of containing Turkish aggression against their ally.

Salient conditions could include the YPG disassociating from the PKK; a cessation in repressing rival political parties in YPG areas; the withdrawal of YPG fighters from northern Iraq, where they are involved in a needless stand-off with Iraqi Kurds; and an agreement by the YPG to withdraw from Raqqa, an Arab city, once it is captured.

As a quid pro quo, and in return for the YPG blood spilled in Raqqa, the Syrian Kurds should have their desire for autonomy supported; have the crippling trade embargo placed on them by the government of Iraqi Kurdistan lifted; and, by means of buffer zones, have their territories protected from further attacks by Turkey and its Islamist proxies.

So far, none of these measures is in play, and comments by US officials have only strengthened a growing suspicion among Syria’s Kurds that they will be discarded by the US the moment the YPG have fulfilled their use and captured Raqqa.

“We have not promised the YPG anything,” Jonathan Cohen, a senior US state department official, told the Middle East Institute in Washington on 17 May – a day after President Erdogan’s visit to the US. “They are in this fight because they want to be in this fight. Our relationship is temporary, transactional and tactical.”

Cohen further said: “We have the YPG because they were the only force on the ground ready to act in the short term. That is where it stops.”

The sense of betrayal felt by the mourners at Derik was perfectly understandable. But Syria’s Kurds should not be so surprised the next time it happens. America, it seems, has promised them nothing more than guns and bullets. 

Anthony Loyd is a war correspondent for the Times

This article first appeared in the 25 May 2017 issue of the New Statesman, Why Islamic State targets Britain

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