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More ratings agency fun, more market crashes…

Sovereign Debt | More ratings agency fun, more market crashes… Anthony Harrington

It has been said fairly often lately that sovereign debt is the other boot waiting to drop. The Greek financial crisis has been largely featured in the press and have not been entirely neglected in QFINANCE’s finance and business blog either. So there was a kind of inevitability about it when Standard & Poor’s sent the world’s stock markets into a nosedive on Tuesday April 27th by downgrading Greece’s debt to junk rating and then followed up by slashing Portugal’s rating as well.

Before S&P had its moment of glory in the sun, the markets were staging a reasonable revival after having had the stuffing kicked out of them by the SEC’s decision to go after Goldman Sachs. The German index, the DAX, for example, had clawed back some 200 points. Once the German dealers got a sniff of the Greece and Portugal downgrades, however, fear filled the air and they went into sell mode, with the DAX giving up all its gains.

Of course, ratings agencies are supposed to alter their ratings from time to time in the light of their reading of circumstances, so no one could complain. When the dealers had had a chance to have a good night’s sleep they awoke to find the world still there, more or less unchanged, and the indices started making their way back up towards their pre-Goldman, and pre-Greek/Portuguese-downgrade high water marks.

If bumping the markets once is happenstance, twice in two days is surely a bit much. S&P seems to have enjoyed causing a rumpus in the markets so much on Tuesday that it just couldn’t resist having another fling on Wednesday, when it repeated the dose, this time with Spain's credit rating downgrade. Despite the fact that many analysts were expecting this, it still knocked the markets back on their heels. The DAX, for example, lost over 100 points, sliding from around 6150 back down to an intra-day low of 6040.

For companies such as Royal Dutch Shell and Glaxo, which both announced good results early on Wednesday 28th, starting a fairly decent rally in London blue chip stocks, the Spanish credit rating downgrade really did rain on their parade. Turnover was higher than expected at Glaxo, at £7,357 million as against expectations of £7,117 million, and a sharp rise in earnings at Shell would ordinarily have given stocks a goodish shove onwards. Not on Wednesday, or at least, not once S&P had done its thing.

The point here is not that nothing should be allowed to spook the markets. They are the incarnation of fear and greed anyway and the combination makes them as skittish as kittens most of the time. The point, rather, is what, exactly, is the value of ratings agencies these days? It is not as if there are not alternatives.

Are you concerned about the risks associated with a particular country’s sovereign debt? Go and look at how the credit default swap (CDS) price is moving. Same for corporate bonds. CDSs, it is frequently said, are a much purer indication than anything provided by a ratings agency of market sentiment with respect to risk in relation to a particular entity, be it sovereign or corporate. And if the market can’t judge that risk accurately, why trust a ratings agency?

It might be worth concluding with the comments of the German finance minister, Wolfgang Schaeuble, who, the next day, commented: “No market participant is prevented from not taking ratings agencies too seriously.” If you can negotiate all those negatives successfully, it boils down to: “Why listen?” Why indeed…

Further reading on sovereign debt and ratings agencies



Tags: banking , credit rating agencies , Greece , sovereign debt , transparency
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