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Euroland - Federation of Retarded Acceleration

Start: 09.07.2012

Questionable Influence of Rating Agencies since the global financial crisis 2008-2009

Citation from: Paper of University of St Gallen/Switzerland:   "Rating agencies, self-fulfilling prophecy and multiple equilibria? An empirical model of the European sovereign debt crisis 2009-2011"by Manfred Gärtner, Björn Griesbach, June 2012.
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6.2 Lessons [lernt from the results of the study]

. . . . . .
A look at individual PIGS countries1 reveals the following. Deteriorating fundamentals shifted Portugal’s rating curve to the right2 by 0.62 rating notches3 between 2009 and 2011. However, the country was downgraded by 8 notches during that time. For Ireland the line shift was 1.32 during those years, but the rating dropped by 7 notches. Greece’s rating curve shifted by 0.15 notches, whereas the country was dealt a hefty downgrade of 12 notches. And Spain, finally, was downgraded by three notches from AA+ to AA-, while its rating line only shifted by 0.46 units to the right. In the context of the results reported in Figure 6, this suggests that budgetary and income shocks may have played a minor role only, and that exceptional changes in the risk assessment of the markets and rating agencies were a key factor in Europe’s debt crisis.

7 Summary and conclusions

. . . . . .
A more detailed look at the dynamics of the effect of debt rating down-grades on interest rates revealed that at least for countries with sovereign debt ratings outside the A range even erroneous, arbitrary or abusive rating downgrades may easily generate the very conditions that do actually justify the rating. Combined with earlier evidence that many of the rating down-grades of the eurozone’s peripheral countries appeared arbitrary and could
not be justified on the basis of rating algorithms that explain the ratings of other countries or ratings before 2009, this result is highly discomforting. It urges governments to take a long overdue close look at financial markets in general, and at sovereign bond markets in particular, and at the motivations, dependencies and conflicts of interest of key players in these markets.

1) Portugal-Ireland-Greece-Spain
2) Refers to a Figure 6: right shift means downgrade.
3) Chosen numerical correspondence: AAA = 1,  AA+ = 2,  AA = 3, . . . ,  A- = 7,  BBB+ = 8,  BBB = 9, . . . ,  CC = 20, . . .

A reader's comment on the Guardian article on sovereign country ratings: "Credit ratings: how Fitch, Moody's and S&P rate each country", 26.08.2012


1 May 2010 10:35AM

Before journalists give any more weight to Standard & Poor´s credit ratings to assist them in the self-fulfilling prophecy game ( just look at the way the world´s stock markets reacted to this week´s news) they ought to have an in depth look at the company´s own ratings.

Having failed to predict the financial crisis, they also failed to predict the failings of Iceland´s two largest banks. It appears other failures have led to huge losses for some investors. At best it seems their ratings are standard, and at worst, they are sometimes very poor.

As I began, with the self-fulfilling prophecy factor taken into consideration, perhaps journalists should give their reports far less credit than they do at the moment. The press have given them so much coverage and credibility this week you could almost believe they are the PR wing of the company.

That confidence is certainly not based on history. By now we should all be very sceptical about anything coming from any international authority dealing with our money. Formerly lauded financial gurus, such as Alan Greenspan, and organisations like the IMF, have records of consistent failure when they have meddled with nations´ economies. But they have not had to suffer the consequences of their meddling, the ordinary people of those nations have.

Let´s get real. None of the large financial institutions, their advisors, or any state regulating authority, predicted the present financial crisis, yet all the evidence was there. Economists, who did see it coming, were ignored and even derided.

These reports, scandalously wrong far too often, don´t just affect the stock markets and bankers - poor dears, losing all that money and even having their bonuses threatened - they affect huge numbers of the impoverished all over the world, and now threaten the poor of Europe with even more poverty.

Greece isn´t bankrupt, the system is. Bankrupt of ideas and bankupt of ideals.
Democracy is being threatened by globalised organisation simply by the fact that nobody votes for them, and yet their policies and assessments of our economies are acted on at government level. These policies take away our livelihoods and our homes unnecessarily far too often. There is almost no accountability whatsoever.

They love to tell us it´s easy to be clever in hindsight. Well, if you take all the information into account, and not just information from those who have a financial stake in the outcome, it´s not quite so hard to predict the future so inaccurately either. Some did. After all isn´t that what they´re getting paid for? Payment on results would provide strong incentive for banks and their advisors to be rather more cirmcumspect when making decisions of worldwide importance.


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