Rating Agencies Go To War
Today Intelligent Speculator comments on how ratings agencies are under siege, and John Kay points out that loans to governments are different because no one tells a government what to do. Demanding repayment from other countries can and has led to wars. If you look at it that way, S&P may be going to war with the US! (maybe they’re hoping for those defense budget cuts)
Kay brings up good points about citizens not wanting to be responsible for some of their government’s actions. Some things are being done at a large enough scale to have a significant impact, and could lead more people refusing to support the decision. Foreign creditors are probably less likely to be repaid than a country’s own citizens too because they have less influence. When times are good it doesn’t matter, but if something goes wrong they will be the first ones overboard. That’s a good thing to keep in mind if you’re thinking of holding bonds outside your own country.
As for the rating agencies, they are always compromised. Since the rating is bought by the borrower they always have a conflict of interest, and it’s hard to imagine any structure that involves payment from someone else and keeps well-run rating agencies. For large corporations it might be possible for investors to sponsor the research but that would likely reduce coverage a lot. And anyone who pays for research like that probably wants to keep the advantage to themselves.
In theory the rating has value due to the agency’s good reputation and that should come from accurate ratings, but that still leaves a lot of pressure since any individual “mistake” probably doesn’t have a great impact. In the end it’s hard to get perfect information from outside; if you need to know you need to look at the objective facts yourself.