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Ireland to S&P: Oh Downgrade, Where is Thy Sting
What if a rating agency downgraded a country and no one listened?
With all of the news outlets focused on tensions in the Middle East, have we forgotten about the elephant(s) in the room? Ireland’s credit rating was downgraded one level to A- today by Standard & Poor’s - leaving it four levels above “junk” status. To add insult to injury, S&P said that the country remains on “credit watch with negative implications.” Nonetheless, the market barely shrugged. In fact, we remain within points of the post meltdown highs. The real kicker was the fact that Ireland’s 5-yr Credit Default Swaps FELL 4.6% today in the face of the downgrade. Perhaps the market has become numb to the rating agencies.
Or maybe it is because S&P is late to the party. Fitch downgraded Ireland to BBB+ in December and Moody’s quickly followed suit lowering it to Baa1 (with a negative outlook). At that time the Euro slid against the Dollar. In fact the headlines suggested that the market still cared. Reuters, for its part, noted “Europe shares fall after Moody’s Ireland downgrade” as the FTSE slipped 0.4% on the news.
Looking back, when Ireland was downgraded by Standard & Poor’s back in August, there was still concern about the cost of bailing out the country’s banks. At that time, Fox Business proclaimed “Europe stocks fall after Ireland’s downgrade.” Even the S&P 500, trading at 1066 the day before the downgrade, fell to 1055. Today, we are over 20% higher in the US. In fact, there are few headlines tying the downgrade to the market’s lackluster performance. Reuters could only muster “S&P, Dow dip on Ireland downgrade” as a response. Oh downgrade, where is thy sting?
Are we too complacent, have rating agencies lost their relevance, or were investors too busy watching scenes from Cairo’s Tahrir Square? With the action in the CDS market, one could say that the downgrade was already priced in, S&P was just catching up. Will the market refocus on the PIIGS once the dust settles or have we really moved on? Time will tell.
This article previously appeared at Stone Street Advisors.
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S and P is irrelevant. They are a politically influenced monopoly rating agency and have to be careful about calling things too soon, so of course they are worthless now. About the only thing they are good for is that bright line they draw between investment grade and near investment grade corporates. Because of institutional guidelines this leads to nice discounts on near investment grade debt instruments with risk adjusted returns among some of the best. In theory all risk adjusted return should be equal if S and P were doing their job properly and there shouldn't be a line between investment grade and junk. So I guess they are good for something. They distort the credit market.
There should be a publicly available FICO type score for all public debt instruments and debtors. This would be a quantitative measure based on the derivatives that trade around that debt instrument as well as certain measures of entity health such as capital ratios, cash flow, debt to equity, etc, but with a real time weighting to the value of the derivatives that trade around that debt instrument. Five quants and about 100,000 dollars could build a debt FICO score that would adjust up and down a lot faster than S and P and could be a great complement to the glacially slow monopoly rating agencies. It would be easy to validate and I don't know why someone hasn't done that already. Maybe they have and it is so high priced that I would never hear of it and it is just offered to large funds.
Bad news = good news. Any bad news brings us one step closer to QE3 .
just QE it.
Ireland is a strange place , soon it will be a even stranger empty place.
"have rating agencies lost their relevance?"
yes they have. Still 4 levels above "Junk"!
rating agencies = comedians these days
Crazy Uncle Ben dont likes to make money, He just loves to buy stawk ! All Aboard !
The markets are not moved by news, fundamentals, sentiment, technicals or anything like that any more....And it is a question if they ever really were..