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Let�??s Not Blame the Messenger
Von Dr. Oliver Everling | 29.April 2008
In January 2003, a critic of the rating agencies wrote to the Financial Times, remembers Roger P. Nye, President, Global Investment Advisors, Inc., Carlsbad, California, USA (www.gia-inc.com). The critic expressed concern about how non-investment grade ratings actually curtail capital to poorer countries, just when they need the funds. The writer said, „Ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds.“
Nye breaks this allegation into its parts. Ratings aren’t a „new breed.“ Investors in fixed income securities as well as equities have used some categorization of investment criteria, such as ratings, since the early 20th century. Ratings are indeed „systemic“ in that they have been accepted worldwide and used in the global capital markets to differentiate among credit risks. No better way has been found to do the job.
Ratings are not „errors“ because there is a very high correlation between rating levels and default rates over time, but they are opinions based to a large extent on subjective criteria and subject to change. Ratings may „lag“ the market’s perception of an issuer’s credit quality, but the reason often is that the market’s short-term orientation differs from the agencies‘ longer-term orientation. Finally, according to Nye, ratings are propagated rapidly because technology permits it and the markets demand it.
With or without ratings, low-income countries have found it difficult to attract capital. Let’s not blame the messenger – it’s the investor that makes the decision based on his data, including ratings, the goals of the firm, and the perceived risk-reward tradeoff. Actually, ratings may even help emerging markets attract capital since investors will see an independent evaluation has been performed on a country that is interested in integrating with the rest of the world.
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