by Richard Barley
Wall Street Journal
March 14, 2011
Ratings firms have always been an easy target for politicians' ire, and they remain so. Following downgrades of Spain and Greece, the European Commission has wasted no time in pledging more regulation. French Finance Minister Christine Lagarde now argues ratings shouldn't even be assigned to countries with bailout packages. At best, much of this activity is a waste of time; at worst, it may be counterproductive.
Greece's downgrade to B1 by Moody's looks harsh, but the market was already there: last Friday, just before the downgrade, five-year bonds were yielding 15.3%, already firmly in the "highly speculative" category. Meanwhile, Spain's downgrade to Aa2 was driven largely by widely held worries about bank recapitalization; many believe that the government is underestimating the scale of the problem. To react to these downgrades with a cry of "regulation" looks like an unwelcome knee-jerk reaction.
The Commission has already correctly identified the biggest problem with ratings: they are embedded in regulation and in investment mandates, meaning downgrades can cause forced selling that exacerbates credit deterioration. Regulators, bankers, investors and even the firms agree on the need to break the links between ratings and investor behavior.
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