ratings agencies

Moody’s rating agency has just downgraded Greece’s government bonds to B1 from Ba1, placing the debt on negative outlook, meaning further downgrades are likely. The move takes Greek debt from borderline junk to “highly speculative” territory.

Fitch and S&P still rate Greek debt three notches higher at BB+ (the equivalent of Ba1, Moody’s previous rating), but this might not last long. Fitch last downgraded on January 14 and has a negative outlook on the rating, while S&P last downgraded in December but has the rating on credit watch negative (meaning a downgrade is imminent, if there is no material improvement). Read more

Determined to stay ahead of the competition, Fitch has cut Ireland’s sovereign debt rating one notch to A+, outlook negative. The three main agencies had almost all settled upon Fitch’s previous rating of AA-, with S&P’s recent cut removing its one notch difference, and Moody’s recent cut and downgrade review looking likely to cut its two notch difference. But Fitch has taken the next step, following the “greater than expected fiscal cost” of the Irish government’s bank recapitalisation plan.

Before you place too much emphasis on this, however, you might want to read a new paper from NBER. Research has found that increased competition among ratings agencies has led to lower quality corporate ratings. In one test, speculative grade firms were 7.7 times as likely to default within three years as investment grade firms when competition was low (i.e. Fitch market share is at the 25th percentile), but only 2.2 times as likely when competition was high (market share at the 75th percentile). Read more

Will Moody’s, S&P and Fitch downgrade each other? The Fed is looking to end its reliance on credit ratings – possibly changing Basel rules to boot.

The Federal banking agencies* have identified their use of those ratings, and are now requesting comments on the best replacements. From the horse’s mouth: Read more

“In the recent financial crisis, the ratings on structured financial products have proven to be inaccurate,” reads p822 of Dodd’s bill. “The activities of credit rating agencies are fundamentally commercial in character and should be subject to the same standards of liability and oversight as apply to auditors, securities analysts, and investment bankers.”

Well, Mr Dodd’s wish might just have come true. The WSJ is reporting agreement between the House and Senate:-

A panel of Senate and House lawmakers negotiating final details of a financial-overhaul bill agreed this week to

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Ralph Atkins

Lorenzo Bini Smaghi, European Central Bank executive board member, has offered another reason why fiscal retrenchment need not spell recession. This has obviously become an important theme for the ECB, with the US increasing the pressure for European policy steps that promote growth.

Speaking in Brussels, Mr Bini Smaghi pointed out the role of financial markets is often overlooked when future scenarios are modelled. “An unsustainable fiscal policy will, sooner or later, receive the attention of financial markets; they tend to react abruptly, generating a crisis which impacts heavily on the economy.”

He went on: “A timely fiscal adjustment which puts debt dynamics back onto a sustainable path entails a stronger growth over time. Read more

How many ratings issuers should we have before some independent benchmark—i.e. a rating—would be needed to discriminate between them?

PwC has announced it is considering a move into the ratings arena, hitherto monopolised—or at least oligopolised—by three major ratings agencies. Perhaps they could start by backtesting the debt ratings issued by these three major players, and comparing them to real events.

Simone Baribeau

The FT’s live coverage of the Financial Crisis Inquiry Commission’s hearing on the credibility of credit ratings agencies has ended. But read on – a play-by-play of one of the most metaphor-enriched hearings on record is below. Testifying on “credit ratings and the financial crisis” were Warren Buffett, the billionaire investor, and Raymond McDaniel, chairman of Moody’s Corp. All times are eastern standard time.

As it happened coverage below.

2:05 pm: It’s over. After a discussion about rating state and municipal securities (Buffett wit #68 “If the federal government will step in to protect the security, I’d rate it triple A, if not, I don’t know what it should be rated.”) the meeting wraps up. The third hearing will begin at 2:30. No live blog for the next session, alas, but you can watch it hereRead more

Ralph Atkins

Rage against rating agencies is rising. The latest to accuse the likes of Moody’s and Standard & Poor’s of simply making the crisis worse is Christian Noyer, France’s central bank governor, who usually avoids creating headlines.

Untimely downgrades – for instance of Spain by Fitch last week- were an “enormous problem,” Mr Noyer told a conference in Seoul, according to Bloomberg. Rating agencies were not just striking at the wrong moment. They were also failing to provide added value, Mr Noyer argued. “The fact that these decisions were taken at a certain point of time under the stress of markets seems to show that credit rating agencies are simply not giving information to markets but taking information from markets.” Read more

Simone Baribeau

How did MBS all go so very very wrong? Here’s the visual answer.

Yes, what you’re looking at is AAA rated securities being created out of debt that, if the system were to be under financial stress, would likely be (depending on the exact structure of the security) among the last 4 per cent to be paid. You buy a AAA security, and if the default rate on subprime mortgages hits 4 per cent, the security is worthless. Read more

“Negligible” risks of a Greek default but “multi-notch downgrade” likely. This from Moody’s in a confusing note yesterday. The ratings agency retains a downgrade review on the country but — unlike S&P — will wait till “shortly after the details of the euro area/IMF programme are unveiled”.

* Moody’s has consistently maintained that Greece’s short-term liquidity and restructuring risks are negligible given the depth of international commitment to maintaining regional financial stability…

* Moody’s believes that the appropriate repositioning of Greece’s rating should therefore be based on the country’s medium-term credit fundamentals…

* Moody’s has previously indicated that a multi-notch downgrade is likely, and that

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Ralph Atkins

So that’s it, then, until October.  The latest steps in the European Central Bank’s ”exit strategy” laid out yesterday, set out how liquidity operations will be managed until the start of the fourth quarter. So will the ECB now just sit on its hands? Possibly. It certainly does not look like they are going to need to tighten monetary policy anytime soon (current market expectations are for the first hike only in the second half of 2011).

But these are turbulent times for the eurozone, and for the guardian of Europe’s single currency. Greece’s crisis may have subsided, but it has not gone away. Policymakers, including at the ECB, know they have to look at making the monetary union function more effectively. Read more

The Indian Ministry of Finance doesn’t pull any punches: it has investigated the $5bn ratings agency industry and promptly issued twelve recommendations.

“A rating is only an opinion, albeit a very influential one,” states the reportRead more

Ralph Atkins

An outburst by Ewald Nowotny, Austria’s cerebral central bank governor, has raised an interesting prospect. Might the ECB do away with the services of ratings’ agencies and judge itself the credit-worthiness of eurozone banks’ collateral?

Late on Tuesday in Vienna , Mr Nowotny highlighted the predicament currently faced by Greece: if Moody’s follows the other rating agencies in downgrading further its assets, they could become ineligible for use in ECB liquidity operations once the pre-global financial crisis regime is restored at the end of this year. Such assets would then become worth much less – sending Greece further into a downward spiral. Read more

From Reuters:

The current situation, where Greece’s fate depends on the decision of a single credit rating agency, is not acceptable, European Central Bank Governing Council member Ewald Nowotny said on Tuesday. Read more

From Reuters:- Moody’s Investors Service has just upgraded Turkey’s government bond rating to Ba2 from Ba3, reflecting the rating agency’s growing confidence in the government’s financial shock-absorption capacity. The outlook was changed to stable from positive. Fitch moved late last year to put Turkey on BB+.

Timothy Ash, an analyst at Royal Bank of Scotland, said: “It’s a bit disappointing that Moody’s only moved one notch, as this still leaves Moody’s rating of Turkey one notch behind Egypt, which I have long failed to understand… answers on a postcard as to why Turkey should be rated behind Egypt. Obviously Moody’s was ‘inspired’ by the hugely successful eurobond issue earlier this week ($2bn placed, and $7bn in orders). Clearly, investors are voting with their feet, irrespective of the views of the ratings agencies.”

Clearly they are not, in fact, risk-free (Argentina proved this). But government bonds are nonetheless viewed as the sole risk-free asset, and banks are required to hold certain amounts of them in their portfolios. The risk-free (read: government) rate is also the basis for valuing almost all assets.

Whether this should be the case is a question posed today by Michael Gordon, former CIO of Fidelity. He argues corporate bonds might be a safer bet; some corporate bonds, after all, come with an implicit government guarantee. (Perhaps corporate bonds could be split into regular and TBTF bonds.) If the view caught on, a revolution would lie ahead for markets, involving mass revaluations and financial remodelling.

But his argument assumes all types of bond issuer are equivalent financial actors. I’m not convinced of this. Read more