Woke up on this Sunday morning to (almost usual now) bad news of the world: Tottenham in London on fire, Israeli protest against to high cost of living, Italy told to tighten their budget… Not even one positive broadcast. Of course, this being Sunday, we all know that shadow of lowered US ratings is there. Now we all can dread Monday even more.
I am not all that good in rating systems, but I think that this system is to serve as warning and information to investors that countries (or companies) present higher risk when investing money (borrowing) in them. Following this of course investors would expect higher returns on funds invested. As of that point though my logic ends, as I would think that only as of higher rating you would get higher return. All deals closed before should remain as those were. After all, deal is a deal.
Why then there is talk of refinancing all existing debt of American citizens? According to what I wrote above, only newly borrowed money should cost more.
The other issue which I don’t understand is timing and mechanism of those ratings. If those are based on financial state of a country or a company, then it should be possible to set them as automatic warning systems. One should be able to work out a ratio or other formula which would say that the ratio of debt against projected income is too high for a year ahead. For example: debt/income = 90% means too high (actually almost a catastrophe in my example). That way each country and each investor (banks, funds etc) would know in advance when the rating would drop (or rise). There would be no surprises for anyone and markets would have no reason to panic – there would be enough time to react to deteriorating solvency.
In current system I, as someone who is not really schooled in this, I see only mischief and think that someone makes tons of money on this, where the rest of the world suffers. Each such news brings panic to the markets and share prices of perfectly good companies, doing actually very well, drop like a stone. markets are no longer driven by logic, only by feelings or reactions. Panic is not a good adviser and we should avoid that at all cost, even getting rid of rating agencies and setting clear rating mechanisms.
If you are someone who knows better what ratings are and how they work, please comment and let me know. My Sunday morning, based on the news and weather, is rated AA. Weather is good, I feel rested, but news of the world are bad. Again.