Shut down the ratings agencies

Remember Friday Night Is Downgrade Night, from the Eurozone crisis? It's back. Last night, Fitch Ratings downgraded the UK to AA-, negative outlook. Here's their rationale:
The downgrade reflects a significant weakening of the UK's public finances caused by the impact of the COVID-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent. The downgrade also reflects the deep near-term damage to the UK economy caused by the coronavirus outbreak and the lingering uncertainty regarding the post-Brexit UK-EU trade relationship. The commensurate and necessary policy response to contain the COVID-19 outbreak will result in a sharp rise in general government deficit and debt ratios, leading to an acceleration in the deterioration of public finance metrics over the medium term.

The Negative Outlook reflects our view that reversing the deterioration in the fiscal metrics beyond 2020 will not be a political priority for the UK government. Moreover, uncertainty around the future trade relationship with the EU could constrain the strength of the post-crisis economic recovery.
For some reason, Fitch thinks that making it more expensive for the UK to finance the necessary fiscal expansion to survive the virus without destroying the economy is a good idea. Presumably it will apply the same logic to other sovereigns in due course. The UK, of course, is a major reserve currency issuer, and its central bank has already indicated that it will do everything necessary to support the Government's actions. But other sovereigns don't have this security.

I well remember the cascading downgrades that wrecked the economy of Greece and frightened other sovereigns, including the UK, into imposing unnecessary and harmful austerity - austerity that is in large measure the reason why we are so ill-prepared now for this pandemic. The message from Fitch is clear. It is threatening sovereigns with a repetition of those cascading downgrades if they dare to spend the money needed to deal with a public health crisis.

Fitch is not the only one. Simultaneously, Moody's downgraded South Africa, on similar grounds. Moody's is also on a mission to downgrade corporate and institutional debt. Swathes of it. Including, for heaven's sake, hospitals:

Downgrading a hospital in the middle of a pandemic is downright immoral. And how in God's name it is sensible to make corporations whose cash flows are evaporating pay more for their debt is beyond me. Have these agencies no sense?

To be fair, we already knew they had no sense and no morals. After all, before the last crisis, they were paid to misprice the risks of toxic securities. And since that crisis, they have forced countries to shred safety nets, underfund healthcare systems, and leave millions without the means to survive a sudden economic collapse. They are the architects of this disaster, just as they were of the previous one.

These ghouls serve no useful social purpose. Shut them down now, before they do any more damage.

Related reading:

Modern gods and human sacrifice

Image from Investopedia


  1. It would surely be a slippery slope if rating agencies also considered morals or sympathy and made adjustments to ratings based on them? The capital markets do not give any consideration to the wellbeing of humans, only the preservation and growth of capital.

    Greece lied its way into Europe. Now, I like the Greeks, but it doesn't mean I am prepared to bail them out financially without being told the risk. Or if a hospital is financially in difficulty, then it is surely not the job of the markets to support it? The markets are not the source of charity funds.

    Rating agencies are there to determine the risk of the borrower based on hard metrics. Which is difficult enough. To add in a +/- fudge factor based on somebody's personal moral position of the day would be to call into question the whole of the rating agency's assessments and thereby politicise the whole edicifice.

    1. I agree with 2 remarks.

      I observed that in emerging or developing markets/economies the agencies' work is quite superficial. They over-/underestimate risk surprisingly often. Then they rush to correct when something happens and inevitably overshoot. Maybe it's the language barrier, maybe access, maybe lazyness...

      The fact that they have to be paid for their assessments, without any oversight, is a gaping conflict of interest.

  2. Thank you for sharing your professional knowledge. Now you have one regular visitor to your site for new topics.

  3. RP - I'm not sure the ratings agencies have the knowledge in the current situation to rate anything as also was the case in 2008 where they provided AAA ratings which turned out to be anything but. Any rating is by and large meaningless in such times and agencies ability to determine risk is just a random guess. Their opinions provide no meaningful additional information.

    1. Hi Simon,

      yes, I agree.

      I am arguing against the idea that rating agencies should take into account moral or sympathy values when assigning a rating.

  4. Is the job of the rating agencies to artificially reduce funding costs for issuers? Certainly not. They exist for creditors, pure and simple. If they were to start ignoring fundamentals they would no longer have a function. Rating actions can be procyclical, especially in the case of fallen angels, but I don't think downgrading sovereigns from AA+ to AA- impacts funding costs. The literature demonstrates that is the case.

    And what do you propose? The end of market discipline? Discipline is the device that encourages issuers to have healthy balance sheets in normal times.

    1. Thank you and RP for bringing some rational points to a rather limited perspective provided in the article.

  5. Thank you Frances.
    Your view is completely shareable.

  6. Totally agree with shutting down the rating agencies, and also agree they only follow market reactions, never ever lead.

    My question is, how do you then differentiate between fiscally responsible vs reckless countries (or companies)? Clearly investors are too lazy to do the work themselves and need a letter assigned to their holdings.

  7. Hi Frances

    Thanks for your commentary and insights. I am wondering your thoughts on the new COVID-19 facilities that have been put out by the Fed. Is the Fed lending reserves to money market funds via the money market mutual fund facility or what is the liability of the Fed if not reserves? Can they even make outright loans to non-banks? I thought the Fed could only lend reserves to banks and not non-bank participants. How is it funding the SPVs as part of the main street lending program? If the Fed is lending out reserves to non-bank participants, that would seem to be a new paradigm for central banks.


  8. Isn't it supposed to come into affect, only if no trade agreement is reached?


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