Don’t blame the messenger

In case you have been asleep for the last couple of days, the sovereign debt rating of the United States was downgraded on Friday has been downgraded by the Standard and Poor’s (S&P) from AAA to AA+.

This has not made S&P too popular in some quarters, particularly in the US government.  President Obama and Treasury Secretary Timothy Geithner, among others, have rapped S&P for making the downgrade.  More ominously, the Senate Banking Committee is considering investigating of S&P.

On the one hand, I agree with S&P’s critics.  The US Treasury securities market is by far the largest and most liquid in the world–dwarfing the market for AAA-rated German Bunds and UK gilts.  Even in the face of a temporary or partial default, this market would have continued to be one of the world’s strongest.

On the other hand, S&P is entitled to its opinion.  If a company with an AAA rating had come within a day or two of defaulting, it is unlikely that it would have continued to carry the same AAA rating several days later.  Despite the popular consensus that default was unlikely, given how close we came to the “D-word,” it is not unreasonable for some analysts to conclude that the deadlock raised–even slightly–the risk of default in the future (AAA to AA+  is a pretty slight movement).

Had the US defaulted, the first target of the financial press would have been S&P for not having acted sooner.

Further, S&P is only one of three major ratings agencies.  The other two have not seen fit to downgrade US debt.  Isn’t the independence of the ratings agencies from each other  something of a healthy sign?  If they all used the same criteria/methodology, we would not have three independent opinions, but one far weightier opinion–one that would be more likely to trigger a financial panic if and when it goes against us.  One of the three made a small move; although the action had fallout, it was not catastrophic.

There is a more serious problem, and that is our tendency to shoot the messenger, typified by the Senate Banking Committee’s preliminary moves toward an investigation.  It seems that every time a European country or bank is downgraded by one of the agencies, the prime minister or some banking executive says that they will not longer have anything to do with the agency/establish a new agency/somehow punish the offending agency.

The ratings agencies render opinions.  They are not always good.  There may be better ways to rate securities, sovereign and non-sovereign alike.

If we don’t like the current system, then we should do something to change it.  But change should come as the result of a process that involves in-depth consideration of the current system and alternatives, not because we are annoyed by one particular ratings decision.

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