<< BackRating the ratings
Posted on Wednesday, August 04, 2010
The credit rating agencies have lost a lot of credibility over the past few years, for their part in the credit crunch.
The fact that they gave some sub-prime mortgage backed securities AAA ratings (the same as they give to the safest governments!) convinced lots of naive institutions to buy them in vast quantities. High returns for low risk, how could they lose!?
However, when these securities ran into trouble, this directly led to one of the worst recessions the world has ever seen.
Given their part in this, there is the potential for those ratings agencies to be sued, which would impact on their profits and their ability to repay their own debt.
As a result, two of the largest ratings agencies (Moody’s and Standard & Poor’s) have just downgraded each other!
Ratings are just one analyst’s opinions anyway. The agencies are also paid by the companies they are rating, leading to accusations that they can be influenced.
The fixed interest fund managers we use prefer to carry out their own analysis of companies, if not ignoring the credit ratings, at least taking them with a large pinch of salt.
The big ratings agencies you see mentioned in the press are all Western companies, and therefore some outside North America and Europe may argue they have a Western bias.
The Chinese Dagong credit agency sees the world slightly differently to Standard & Poor’s and the like. Dagong give China a AAA rating (naturally), whilst S&P gives China an A.
On the other hand, while S&P believes the USA and the UK should be AAA rated, Dagong believes they are only AA.
In terms of financial strength, Dagong clearly has a point. Whilst most of the Western world runs large deficits and has resorted to “printing money” (quantitative easing), China has been sitting on a huge surplus that they’ve almost not known what to do with.
Incidentally, one of the main things they’ve been doing with their surplus cash is buying US government bonds, directly propping up the American economy and therefore allowing it to keep its S&P AAA rating.
It’s a funny old world...
Mike Deverell
Investment Manager