Re:The plot against France
by smoorman1024 on Tuesday November 12, 2013 @02:31PM
(#6720280)
Although sovereign credit ratings by the big Credit Rating Agencies do have a small impact on borrowing cost, their ratings should still be taken with a grain of salt.
In particular on page 10 table 8 you can see the additional impact that a credit rating upgrade or downgrade has on borrowing cost. You could also read throughout the paper and in the conclusion that a lot of what determines a sovereign credit rating is correlated with publicly available macro indicators (i.e. the market was already moving in that direction anyways). Take a look at page 9 chart 2 to see the direction that spreads are moving before an after a ratings announcement.
My point is that Ratings agencies don't swing a huge sledgehammer; its more like a small mallet. The author of the article is right you should be skeptical of the incentives behind these ratings decisions but you also shouldn't fear them.
Take a look at this study by the New York Fed.
http://www.newyorkfed.org/research/epr/96v02n2/9610cant.pdf
In particular on page 10 table 8 you can see the additional impact that a credit rating upgrade or downgrade has on borrowing cost. You could also read throughout the paper and in the conclusion that a lot of what determines a sovereign credit rating is correlated with publicly available macro indicators (i.e. the market was already moving in that direction anyways). Take a look at page 9 chart 2 to see the direction that spreads are moving before an after a ratings announcement.
My point is that Ratings agencies don't swing a huge sledgehammer; its more like a small mallet. The author of the article is right you should be skeptical of the incentives behind these ratings decisions but you also shouldn't fear them.