Friday afternoon, just before markets were due to wrap up for the week, Moody's Global Credit Research released a ratings action on UK government debt quality, downgrading it from AAA to Aa1.
What role exactly does Moody's think they play in the market?
This is the same firm that was instrumental in giving Aaa ratings blindly to sub-prime mortgage assets , which exacerbated the downturn in the financial panic of 2008.
This is the same firm that is being sued for fraud for its role in duping investors and threatening the integrity of the financial system (a judge recently ruled against ratings agencies who attempted to dismiss the fraud suit).
Recall that when the Moody's CEO testified at the Financial Crisis Inquiry Commission hearings in 2010, he made an admission worth repeating, as quoted directly from the business-friendly CNBC:
The chief executive of Moody's says his company's inaccurate ratings of mortgage-related investments were "deeply disappointing" but investors shouldn't rely on ratings to buy or sell securities.Not only does Moody's admit their ratings are worthless (by fessing up to the fact that they can't rely on them), but the market has already figured this out:
Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of the 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974. This year, investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P.Say what you want about the markets, but they are efficient mechanisms for pricing of assets. Yes, they fail, but they are also brutally honest and reflect the intersection of supply and demand of a particular asset. And in the case of ratings agencies, especially Moody's, and especially their ratings of government debt, markets don't care what they say, because they, as the CIO of Charles Schwab said to Bloomberg:
For national debt, following decisions of the arbiters of credit risk is less reliable than flipping a coin for determining borrowing costs
“Credit-rating agencies historically lag the real economic fundamentals, whereas markets are ahead.”We've also seen how the markets reacted to the downgrade of US debt, not giving a single fuck, essentially.
And of course they've failed miserably in their analysis of Japan, as they have downgraded debt quality rating numerous times, to well-below Aaa over the years. Meanwhile, here's how the 10-year Japanese debt yields have responded to the numerous downgrades of its debt:
The downgrades only seemed to make Japanese bonds more popular, and the yields have tumbled in the face of all the doom and gloom by these ratings crooks.
So why should anyone care about the whimsical sub-par research efforts of Moody's?
Alas, despite a knee-jerk reaction in the currency market leading to a decline of GBP/USD in the closing hours of the market Friday evening, this decision will not have any impact on the UK's bond markets or financial security.
Instead, this is yet another example of irrelevant ratings agencies trying to save face by disingenuously downgrading the perception of credit quality of monetary sovereigns like the UK.
Predictably, the warnings of this action have only emboldened sadistic conservatives like George Osbourne, who stubbornly insist that austerity in the UK is working, despite mounds of evidence to the contrary.
However, the intransigence of the austerity-happy conservatives in the UK won't be appreciated in the face of a suffering population, as a recent poll shows:
But some 61% of those questioned by pollsters Ipsos Mori believed they would be affected over the coming 12 months. Almost half (48%) said the Government had made the wrong decisions about where the cuts should be made.Given Moody's track record in rating the sovereign credit of the US and Japan, and the fiasco of their rubber-stamping of toxic sub-prime debt, Britons have nothing to fear from this news of a downgrade of their national debt, save for the misguided austerity policies of their elected officials.
If anything, they should instead take it as a sign of positive things to come!