Warning: rating agencies can do you harm

[Joanne98]

Standard & Poor’s has downgraded Greece, Spain and Portugal and has warned Ireland that it might suffer a similar fate. Do I hear this right?

Is S&P still in the business of producing risk analyses? Should the rating agencies not have gone out of business after they told us for years that the risk associated with the ballooning debt of banks and large companies was nothing to worry about? How can these agencies, which were systematically wrong in the past, have any credibility in whatever risk analysis they make?

Yet, remarkably, they are alive and well, and their credibility seems to have been restored. The rating agencies are now believed by the market when they warn us of risks associated with a number of eurozone governments’ debt. As a result, the interest rate these governments have to pay on their borrowings increases.

In the recent past, the market believed the same rating agencies when they put a stamp of approval on the exploding debt of private companies. As a result, these companies could finance themselves in the markets at ever lower interest rates. It led to disaster.

http://www.ft.com/cms/s/0/8f49a084-e8c1-11dd-a4d0-0000779fd2ac.html?nclick_check=1