Two months ago, I wrote about Moody's downgrading the UK's AAA debt rating and suggested:
...this decision will not have any impact on the UK's bond markets or financial security.And of course, since that downgrade, UK Gilt 10-year debt has gone from over 2.00% to about 1.60% -- 40 basis points lower in the yield, reflecting higher demand for British debt, and more investor confidence in the UK's credibility since the Moody's downgrade.
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.
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!
As I wrote about in the other diary, these ratings agencies are corrupt and lack the ability to competently rate monetary sovereigns' debt, as well as other forms of debt as we saw in the Financial Crisis of 2007-8, as quoted from the FCIC:
"The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies."We're just now seeing some progress in the courts against these corrupt ratings agencies, as evidenced by S&P being taken to court for their role in the crisis.
Additionally, Egan-Jones in particular has been fingered for fraud ("misrepresenting the firm's actual experience") and has been banned for 18 months in the United States from rating credit of the government or Asset-Backed Securities. So when the news came out last Friday that Egan-Jones has decided to downgrade German debt, I couldn't help but just laugh.
Now, while Germany is not a monetary sovereign and thus is held to a different set of conditions that determine their creditworthiness, they are easily, by far, the most credible Eurozone member of the bunch. Thus, this action by Egan-Jones to downgrade German sovereign debt is a futile attempt at establishing credibility in an industry where there is none left.
The track record of these ratings agencies is getting so amusingly bad that countries ought to be begging for a downgrade to get a lower yield on their debt! The market clearly doesn't care about these discredited firms and their debunked methodology, especially for sovereign debt.
Back at home, Dodd-Frank has established a number of rules to govern ratings agencies. The question is whether sufficient enforcement of the rules will put these corrupt organizations in their place. Until then, when a ratings agency downgrades a monetary sovereign (note: this excludes the €-zone nations), take it as a signal to buy!