Do Markets Still Trust Rating Agencies' Decisions?

Belgium became the latest small European nation to come under the cloud of having its credit ratings outlook cut on Monday. As rating agencies themselves are increasingly criticized, is this the threat it once was?


Michael Lewis, in his book The Big Short, famously said that the folks at Moody’s and Standard & Poor's, "appeared to know enough to justify their jobs, and nothing more."

Fitch became the second ratings agency to threaten Belgium with a credit downgrade, after Standard & Poor's warning from last December.

Economists have called Belgium, which has been without a government for close to a year because of disputes between Flemish and Walloon parties, the Greece of the North because of its high level of public sector debt.

Belgian public sector debt was close to 100 percent of gross domestic last year, way above France and Germany, and lower only than that of Italy and notoriously troubled Greece.

While Fitch affirmed its AA+ rating for Belgian government debt, its outlook is now negative rather than stable.

"The negative outlook reflects Fitch's concerns over the pace of structural reform in the coming years and the ability to accelerate fiscal consolidation without a resolution to the constitutional crisis," Douglas Renwick, a director in Fitch's sovereign group, said.

Belgium’s situation has some important differences to Greece.

Its budget deficit is relatively small at around six percent of GDP, household debt levels are substantially lower than in the PIIGS countries (acronym used by markets for Portugal, Ireland, Italy, Greece and Spain), and its trading partners are more likely to be relatively healthy northern European economies, according to economists at Capital Economics.

The ratings agencies Moody’s and Standard & Poor’s, which are both American, and London-based Fitch, have been criticized for not spotting problems with other economies, and with sub-prime mortgage debt, quickly enough during the credit crisis.

Critics have also pointed out that the US, where two of the agencies are based, has maintained its coveted AAA rating despite reaching its debt ceiling earlier this year.

This is partly because US Treasurys are still seen as a relatively safe haven, and due to the role of the US dollar as many central banks’ reserve currency of choice.

Bill Gross, co-founder of Pacific Investment Management (PIMCO), said last year that his company no longer finds rating agencies useful.

"Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense," he said.

And the International Monetary Fund (IMF) said in September that a "cloud of suspicion" hung over credit rating agencies.

The IMF believes the rating agencies need to be more open about potential conflicts of interest and give more insight into how good they are at assessing risk.

"There are too few of them, too many American and not enough non-American," Jan Randolph, Director of Sovereign Risk at IHS Global Insight, told "The message from the regulators is they are very useful but they are not finding the risks in the way that banks are, so they want to get banks to do their own ratings and pool them with ratings agencies."

“The agencies would say that they look at fundamentals rather than all market signals, so they’re a step or two removed from the vagaries of the market and are therefore more solid,” he added. "They have some independence as they're not trying to sell shares to anybody."

Ben May, European economist at Capital Economics, said: "Over the crisis, there have been times when the agencies have caused big movements in asset prices."

"As time has gone on, their impact has been a lot less," he said.