On Sovereign Ratings Of High Income Countries

S&P, which continues to grant the UK triple-A status, cut France's rating to double-A last week. We can understand why ratings matter for corporations. The rating agencies may have access to private information. We can understand why ratings for many low income economies can be helpful. The information may be difficult to obtain and might not be followed by many economist.

However, when it comes to the high income countries that have troves of analysts and economists scrutinizing their economic data, we are skeptical of the value of ratings. They rely on publicly available information, which is readily accessible.

The asymmetries of information are minimal. What might vary is how the information is processed. This seems true in general. In essence then, it is a question of the timeliness of the rating agencies actions, and the capability of their economists.


This Great Graphic, comes from Thomson Reuters, which synthesized the data from the three main rating agencies for the high incomes economies. Judging from the lack of market reaction to the rating agencies actions, not only in France, but also the US, Japan, UK, and Italy (not meant to be exhaustive; merely suggestive), one can conclude that the rating agencies are slow to reach the conclusion that investors already have, or that such ratings, especially in a period of financial disintegration (strengthening of the home bias) are less relevant.

It may be that movement within the high investment grade status is of little significance, but a move out of investment grade would be seen as more serious. Yet this would seem to be a bit circular as many asset manager mandates have rules about the credit rating, defined by one or more of the top three rating agencies, of their investments. Those fund managers that are limited to investment grade investment only, may have to jettison bonds if they lost that assignation.