Do rating agencies still matter?

S&P’s threat to downgrade Germany’s rating is met with a shrug

When the rating agency Standard and Poor’s announced recently that it was considering downgrading the debt of 15 eurozone countries, including that of economic powerhouse Germany, Angela Merkel reacted with what, if she were French, could have been described as a Gallic shrug. “What a rating agency does,” the German chancellor told reporters, “is the business of the rating agency.” Not every European nation was as sanguine. France—threatened with a two-notch cut to its triple-A ranking—may have had more reason for worry. But Merkel’s response struck a chord nevertheless.

Rarely in their century-plus-long histories have the big three rating agencies been held in such low regard. S&P, Moody’s and Fitch have all been castigated for their failure to predict the housing and banking crises of 2008. (Up until nearly the moment of collapse, the big three continued to rate asset-backed securities stuffed with subprime mortgages as triple-A investments.) Those failures came stacked upon earlier blunders involving Enron, WorldCom and the bankruptcy of Orange County, Calif. After S&P downgraded the credit rating of the United States this past August—relying on numbers that were reportedly $2 trillion off base—many began to question not just the rules that govern the agencies, but even their continued relevance to the financial system.

Those questions only grew louder after S&P waded into the European crisis. Analyst and noted financial blogger Barry Ritholtz used the occasion to ask whether rating agencies still serve any useful purpose at all. “Have analysts figured out that [the agencies] are corrupted, conflicted, unable to honestly discharge their duties?” he asked in a blog post. “Or is it simply that they suck at what they do?” For the U.S., he pointed out, borrowing actually grew cheaper after their debt was downgraded, suggesting investors all but ignored the move.

As for Germany, it remains highly unlikely the country will default on its debts. Still, the political situation in the EU remains unpredictable. And expressing that unpredictability is a rating agency’s job—just one they haven’t always been very good at doing.

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