Well, back when the first round of downgrades were coming around, I talked about how EU member nations were potentially in threat of downgrade. Well, here we go on that ride again: http://www.bloomberg.com/news/2011-10-04/euro-area-nations-below-aaa-may-see-ratings-cut-moody-s-says.html
The point here, is not to tell you “I told you so”, but rather to ask an interesting question: what is the rating agency’s role in our society?
Well, the obvious problem that I will note with the overused quote: “Hey, the rated Lehman AAA before they collapsed” is the problem of unreliability. When your customers can just say, “look, give me an AAA, or I could just pay the guy next door to do it”, you really have not much choice in your ratings. While this is the true problem, what of it? What’s a better system?
Ok, let’s go pure free market and say: “let’s allow CDS prices to determine the financial stability of a nation.” The problem with this, is that if we have too many false “sell” signals, the entire credit system will collapse. That’s a risk we can’t afford. Then, why doesn’t the government rate debt? Well, then a government will always give themselves AAA.
Let’s just face it, rating agencies are like democracy: until the next great philosopher comes along, we just have to bite our nails and use the “terrible” system. At least it’s better than anarchy.
Also, if any reader has an alternative, I would really like to hear about it and look into it.