Moody’s decision yesterday (Feb. 22) to knock the UK’s sovereign debt down a notch has, of course, got all of us journalists cranking our hamster wheels. But as a good many journalists have also pointed out over the past few months, these downgrades are often meaningless, irrelevant or even downright misleading, and this one in particular. So why do they generate so many headlines?
There’s a summary and some background reading about what’s wrong with ratings below. As to why they create so much noise, though, t he simple answer is that downgrades are just too easy to write about. They sound bad, they contain something measurable, and they provide a quick headline. The measurability is especially key here: You can dispute what a measurement means or how much it matters, but not the measurement itself, which in this tendentious world, makes it easier than almost anything else for a journalist to report on.
Like monthly economic data, quarterly earnings, CEO firings, business rankings, and much else that makes up the standard fare of business news, downgrades are therefore useful news events. Unfortunately, like much news, they’re not very informative without a lot more context. It’s a weakness of the journalistic form that most news outlets just aren’t set up in a way that provides all that context with each piece of news. (We’re trying to experiment with form at Quartz, though, and we’d welcome your suggestions for solving this problem at email@example.com).
The short version of the argument against paying too much attention to ratings downgrades is:
Ratings downgrades don’t matter to the markets. They’ve usually been anticipated and priced in beforehand (though the agencies’ advance warnings of a downgrade, i.e., putting a country on “negative outlook”, have more effect).
They shouldn’t matter to politicians. They do carry a stigma, but only because the media make such a hoopla about them. In practice, though, there’s no obvious relationship between ratings and a country’s borrowing costs. (When Standard & Poor’s downgraded the US’s debt in 2011, its bond yields fell.)
They say nothing about the risk of default. Well, not nothing; but in practice, for a country like Britain or the US—as opposed to, say, Argentina, which is used to it—a default would be so disastrous that it will do pretty much anything to avoid one. A one-notch downgrade for Britain doesn’t mean a British default has become one notch more likely; at most it’s a recognition that Britain might have to hustle a bit harder (e.g., print more money) to prevent one.
Nobody trusts the ratings agencies any more anyway. Their credibility has taken quite a few hits recently.
Moody’s Downgrades UK’s AAA Rating: Not Much Happens. Tim Worstall of Forbes on why a downgrade means even less for the UK, which can avoid a default by printing more of its own currency, than for euro-zone countries, which can’t.
The condensed Moody’s downgrade. The New Statesman’s Alex Hern witheringly boils down Moody’s analysis to this: “Britain’s attempts to cut its debt have harmed its attempts to cut its debt, and this could harm its attempts to cut its debt.”
Moody’s downgrade: both Osborne and Balls get it wrong. Jonathan Portes, former chief economist for the UK Cabinet Office, says Britain’s chancellor and shadow chancellor both took the wrong line when Moody’s warned of a downgrade a year ago.
What took you so long, Moody’s? The FT’s Joseph Cotterill on why the downgrade tells us nothing new.
A government at the mercy of events. The FT’s Martin Wolf says Moody’s decision is “neither surprising, nor informative nor, in itself, damaging. But it is humiliating for the coalition government. It indicates that its programme of fiscal austerity is failing, on its own terms.”
Austerity Doesn’t Pay as Debt Markets Ignore Rating Cuts. A Bloomberg analysis last June, showing that downgrades moved markets up about as often as they moved them down. Felix Salmon of Reuters picks apart the study, arguing that while it shows that ratings don’t matter to markets, it actually proves nothing about austerity policies. He also points to an earlier IMF study (pdf) showing the same result.
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