Swiss study questions motives, methods of rating agencies

A new study has questioned the decision-making of the three major rating agencies as ‘arbitrary’, and questioned the motives and the methods for the severe downgrades of Greece, Spain, Italy, Ireland and Portugal.

A working paper from the University of St Gallen, authored by Manfred Gärtner and Björn Griesbach, has found that the downgrades “cannot be justified on the grounds of a decline of their economic situation and public finances”. 

Spain, the university says, should have been downgraded by half a notch but lost three. Ireland should have lost one and a half rating levels, but was downgraded by seven. Portugal should have lost half a level, but was dropped eight levels. “Even Greece’s rating should only have gone down by 0.14 on the strength of objective economic indicators at the time, but actually it plummeted by 12 notches, from A to CCC.”

The paper suggests that the “systematic nature and extent of arbitrary rating downgrades leaves [the rating] agencies with a central responsibility for the debt crisis.”

Manfred Gärtner, study co-author, questioned the motives of the rating agencies. In his paper, he says: “Suspicions have been put forward that sovereign bond ratings may not be all that rational. They may, deliberately or not, contain systematic biases or may be misused for other purposes.”

Speaking to Swissinfo.ch, he said: “These ratings cannot be explained by any of the variables we used in our calculations, so there has to be a suspicion that the agencies switched to a different model for some countries. We have to ask the question: is it reasonable for such big mistakes, which are way off past ratings patterns, to have happened unintentionally? If the answer is no, then there has to be some purpose behind these ratings.”

Gärtner questioned the integrity of the ratings by suggesting the agencies had used different statistical formulae for the Eurozone states. He said: “These ratings cannot be explained by any of the variables we used in our calculations, so there has to be a suspicion that the agencies switched to a different model for some countries.”

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