Wednesday, 1 April 2009

Rating the Raters

Which is better, health or wealth?’, asks Cardinal Brady, RC Primate of Ireland. Standard and Poor’s (curious name) – the new shadow Government - seem to think otherwise.

Writing in today's Irish Times, Ciaran O'Hagan declares that 'The Prospects for the growth of wealth and income are the chief criteria used by rating agencies.' He was referring to Standard and Poor's downgrading of Ireland's AAA rating this week. And, like the Skibbereen Eagle, they are watching every move the Government will make next Tuesday.

Can anyone tell the exact criteria used by Agencies such as Standard and Poor’s? Some questions are in order:

    • Do these ratings adjust for income inequality (recall Wilkinson’s sick societies hypothesis)?
    • Do these ratings adjust for income sustainability (what was S&P saying before the bubble burst?)
    • Who gets to set these ratings?
    • Who rates the raters anyway?

It is worth citing what S&P themselves say about their ratings:
A Matter Of Opinion
“Standard & Poor’s ratings opinions are based on analysis by experienced professionals who evaluate and interpret information received from issuers and other available sources to form a considered opinion.

Unlike other types of opinions, such as, for example, those provided by doctors or lawyers, these ratings opinions are not intended to be a prognosis or recommendation. Instead, they are primarily intended to provide investors and market participants with information about the relative credit risk of issuers and individual debt issues that the agency rates.

Standard & Poor’s credit ratings opinions are also disseminated broadly and free of charge to recipients all over the world."


Pavement Trauma said...

-- Do these ratings adjust for income inequality
Does the Building Energy Rating (BER) adjust for the quality of decor of a house? No. Why not? Because it is just not relevant to the matter being rated - credit worthiness.

Slí Eile said...

Exactly - that's the problem with S&P and other ratings -
1 they focus on one thing only ('credit worthiness'); and
2 and they can't even get that right.

The parallel with house decor quality is unfortunate.