Besieged By Legal Liabilities, Criticism of Sovereign Ratings Methodologies, Fitch, Moody's, S&P Face Rough End to 2012
By Eleazar David Meléndez | December 19, 2012 5:44 AM EST
Criticism of global credit rating agencies and their methodologies continued to roll out unabated this week after an analysis conducted by Bloomberg News showed credit markets were more likely than not to move against the grain following a sovereign credit action by Moody's Investors Service.
Specifically, the number-crunching by Bloomberg, which was published Monday, found that after a Moody's announcement credit spreads moved the opposite direction of what would be expected 56 percent of the time. A similar analysis of rating actions conducted by rival firm Standard and Poor's found the market moved in the direction their credit action implied 50 percent of the time -- meaning downgrades or upgrades to national credit ratings had about the same predictive probability as a toin coss.
“Credit-rating agencies historically lag the real economic fundamentals, whereas markets are ahead,” Brett Wander, the chief investment officer for fixed income in San Francisco at Charles Schwab Investment Management, told Bloomberg.
Indeed, the idea that credit rating agencies are far behind the times when addressing sovereign ratings, and the suggestion those agencies have not yet fully incorporated the effect of central bank support to the world's largest economies, were the main gist of the Bloomberg analysis. The news agency cited Bonnie Baha, the head of global developed credit at Los Angeles-based DoubleLine Capital LP as noting “if ever there was proof positive that ratings were a lagging indicator, it’s certainly been true with the way the rating agencies have responded to” the credit and sovereign debt crisis in Europe.
The report was only the latest salvo in what has become a sustained attack on the very reason why credit rating agencies exist. Earlier, in late November, a prestigious German non-profit institute presented a framework for establishing an alternative to the private rating agencies, an idea which seems to be drawing increasing support.
The agencies are not taking the challenge lightly. After being particularly criticized, Moody's announced Tuesday it would propose several amendments to the way it rates sovereign debt and open itself up to outside recommendations early in 2013. The proposed amendments “are aimed at further increasing the transparency and forward-looking nature of Moody’s current approach,” Moody's said in a statement.
The criticism of the way the rating agencies handle their sovereign debt credit ratings, while certainly a headline-grabbing issue, is not even the biggest challenge these companies will face entering the new year. Following a decision earlier this year by an Australian court that found major agency Standard & Poor's would be held liable for incompetence after assigning top ratings to mortgage derivative-backed investment products that blew up within a year of being sold, rating firms are facing a yet-to-be-ascertained mountain of legal liabilities worldwide.
Not that the agencies haven't been in a tight spot before.
"The rating agencies have been the all-purpose bogeymen for the crisis," William J Harrington, a former senior analyst at Moody's wrote in an essay posted Monday at several finance-focused blogs "They are effectively protecting these other players – who seem quite happy with this arrangement. Meanwhile, people at rating agencies say: 'Just blame us, we're used to it.'"
To contact the editor, e-mail: