To me - its quite astonishing that the Ratings Agencies still hold so much sway , given that they have been thoroughly discredited in the last 2 years.<p>I wonder, what it would take to have another ratings agency ? Is this simply a case of Market Incumbency ?
Large pension funds have Terms & Conditions which state what classes of debt/asset each fund is allowed to hold.<p>These are often defined relative to the Rating Agency score. So when the rating changes (down), they are obliged to sell their holdings and not buy any further debt.
<i>All that S&P has done is to say that Greek debt is junk; but surely Greek debt can't in reality be junkier today than it was last week just because S&P says so?</i><p>Ermm, actually it can, because yesterday the probability of a bailout by Germany was different that it is today. S&P in this case is merely reporting what is.
I don't see how an article titled 'Credit Ratings Agencies - Who made them so powerful ?' doesn't discuss the idea of the Nationally Recognized Statistical Rating Organizations (Yes, there is a passing mention of the SEC, but this is the answer to the question):<p><i>Ratings by NRSRO are used for a variety of regulatory purposes in the United States. In addition to net capital requirements (described in more detail below), the SEC permits certain bond issuers to use a shorter prospectus form when issuing bonds if the issuer is older, has issued bonds before, and has a credit rating above a certain level. SEC regulations also require that money market funds (mutual funds that mimick the safety and liquidity of a bank savings deposit, but without FDIC insurance) comprise only securities with a very high rating from an NRSRO. Likewise, insurance regulators use credit ratings from NRSROs to ascertain the strength of the reserves held by insurance companies.</i><p>Source: <a href="http://en.wikipedia.org/wiki/Nationally_Recognized_Statistical_Rating_Organizations" rel="nofollow">http://en.wikipedia.org/wiki/Nationally_Recognized_Statistic...</a>
Two things make them powerful:<p>- The vast amount of people that simply believe the opinions published by the agencies and consider those the absolute truth<p>- originators of policies that requires ratings to be put on several financial products before being allowed to be bought by certain institutions, which glorifies the agencie's opinions as the absolute truth
It seemed to me that the market had already begun to move against Greece. If credit agencies don't reflect the lack of political momentum (and a plan to pay creditors) then agencies loose their credibility.<p>I doubt that S&P acts in an isolated manner, and is part a political play and can be influenced by other organisations, economic reports and political moves. This may even be a mechanism to sell the bailout to the German electorate.
(this is a bit tongue in cheek but..)<p>Is there any more powerful and feared financial reporter in the UK than Robert Preston?<p>The guy - who's essential task is to report on the comings and goings of financial institutions so the rest of us can understand - materially contributed to public panic during the banking crisis of last year.<p>At the time his doom and gloom reporting on national television caused many uninitiated people (in the UK) to panic about the state of the economy; when a more rational response would have been better.<p>Peston may claim he is only reporting the facts; but his treatment of Northern Rock may well have helped push things over the edge.<p>Perhaps I am being over zealous in giving Peston some of the blame. Who knows.<p>[In all seriousness, though, Peston has a history of disliking almost all financial institutions for some reason - and as a result the BBC reporting of the banking crisis was both skewed and problematic. I know quite a few people who misconstrued things from the tone and delivery of information and as a result panicked like crazy.<p>He may have the makings of a point here; but I always take his opinions with a pinch of salt :) ]
Ratings agencies must be the most easily forgiven part of the financial system. Why do the markets still move on their advise given that they were proved completely falable less than 12 months ago!