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11 October 2012

Credit rating agencies still not very good at rating credit

The University of Cambridge is apparently a safer investment than the UK.

By Alex Hern

More ratings-agency craziness. Cambridge University is entering the bond market for the first time, and Moody’s has rated its debt as safer than Britain’s. The Financial TimesMichael Stothard and Chris Cook report (£):

Britain’s richest and second-oldest university issued a 40-year, £350m bond, taking advantage of low yields to fund a new laboratory for stem-cell research and accommodation for postgraduates.

The bond, priced at 60 points over gilts, was well received. Last week, the university was awarded a triple A rating by Moody’s. The agency said the rating reflected Cambridge’s “outstanding market position, significant amount of liquid assets and strong governance structure”.

Yet more evidence that ratings agencies “quite simply don’t understand what they themselves are saying”, in the word of NIESR’s Jonathan Portes. As Matt Yglesias writes, there is no possible situation in which Cambridge bonds, denominated in British pounds could be safer than UK sovereign debt:

When the UK government borrows money, it borrows pounds sterling. The UK government also has the capacity to create infinite quantities of pounds sterling instantaneously. Therefore, the UK government can never be forced by economic circumstances into defaulting on its debt obligations. At worst it could be forced into inflationary policies that erode the value of its pound-denominated debt. If you’re an investor, that’s a real thing to worry about when buying British debt. But any such inflation would equally impact any pound-denominated debt no matter what the circumstances of the issuer. University of Cambridge debt can’t be safer than UK sovereign debt in inflation terms.

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The bizarre decisions made by the ratings agencies have always been there – back in 2002, for instance, Moody’s downgraded Japan below Botswana – but finally, awareness is starting to become more widespread. If that awareness can penetrate the world of finance, then the end of their influence may be nearer than it looks.

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