S&P’s Responsibilities

Reading through some of the reactions from “experts” to the S&P’s downgrade of US debt, I see words such as “irresponsible”, “misguided” and “inappropriate” being bandied around. These experts seem to be of the view that in view of all that the US is already going through (given the debt crisis et al) it was not correct for the S&P to push it further down into the abyss by downgrading its debt.

Now, the S&P is a rating agency. Its job is to rate debt, categorizing it in terms of how likely an issuer is to honour the debt it issues. It is a privately held firm and it is not the job of the S&P to prevent global crises and save the world. In this case, the S&P has just done its job. And having been following the crisis for a while I’m of the opinion that it’s done the right thing (check Felix Salmon’s article on this; he says the downgrade is more due to the risk of the US’s willingness to not default, rather than its ability; given that there is no permanent solution yet to the debt ceiling and it issues all debt in its native currency).

If a simple move like this by a private company is going to bring down the world, it is because of screwed up regulations (read Basel 2 and Basel 3) that ended up giving way too much importance to firms such as this. And I’m sure the US had adequate representation at that meeting in Basel where the accord was adopted, so it can be partially held responsible for the enormous power that rating agencies currently wield.

The bottom line is that excessive regulations based on dodgy parameters have been responsible for a lot of the mess that we see today. #thatzwhy we need strong regulations.

One thought on “S&P’s Responsibilities”

  1. Quite ironic given S&P caused the last recession (doing their job) by giving AAA ratings to junk securities, Lehman Bros, ML etc. just days before the crash.

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