Monday, July 25, 2011

Understanding the Pressure on Ratings Agencies Not to Downgrade U.S. Debt

Marc Joffe, who formerly worked as a Senior Director at Moody’s Analytics, expalins what a downgrade would mean from a ratings agency perspective and why agencies are slow to make such downgrades:
... sovereign rating changes may impact other ratings in ways that create commercial challenges for rating agencies and investors. Given the dependence of numerous bond-issuing entities on the US government, a Treasury downgrade may trigger a large number of municipal, corporate and structured finance issuer downgrades as well. This cascade of downgrades would impose challenges on a rating agency’s internal systems, staff research skills and relationships with affected issuers.
To the extent that certain institutional investors are restricted to investing in AAA securities, a Treasury downgrade would result in the forced liquidation of many assets. Institutional investors – who often purchase research, data and analytics from ratings firms – may react negatively to such a scenario. Moreover, such portfolio changes could substantially impact interest rates. If these interest rate changes are blamed on the rating agencies, they may suffer reputational consequences.
Such concerns may unduly retard rating changes that appear justified by the issuer’s credit status...
(Thanks 2 Jeffrey Rogers Hummel)


  1. When a family has bad credit, they are forced to live within their means. God forbid the government be forced to do the same!

  2. It looks like the conversation is not "What is the right thing to do in a potential crisis?" but "How can we manage this crisis the right way?"

  3. The ratings of rating agencies have become as irrelevant as a market signal as the FED's interest rates.

  4. DVReznicek,

    I second your well-intentioned sentiment but to be clear and precise it should be pointed out that the government has no means which it has not first stolen from someone who is truly productive.

    The government produces nothing. Even in a "minimal" state, the government is living beyond its means.