While we look to the various credit ratings agencies to estimate the credibility of the big banks and the world economies, it’s time to ask the question: how much credibility do these agencies have themselves?
Moody’s, S&P, Fitch and many other credit rating agencies’ own credibility remains tattered and bruised from their roles in the sub-prime issues of 2008. The aftermath, can still be felt today.
S&P, the world’s largest rating agency, still stands accused by the Department of Justice of defrauding investors to the sum of approximately $5 billion, by allegedly knowingly miss-rating sub-prime mortgage bonds in the run-up to the original crisis.
More recently, the market reactions to credit downgrades beg the question:do investors actually take these agencies seriously anymore and are they telling us anything we don’t already know?
Generally, we still see a reaction from the markets when these announcements are made. However, we also see very quick retracements back towards the original trend. So investors still have great opportunities to take advantage of the volatility that is produced.
Since the 1980s, most Western nations have been encouraged, by the banks and governments to “live beyond their means”. Credit, credit cards, unsecured loans and re-mortgaging have risen to values that simply could not be sustained. Unfortunately, since 2008 we have had to start paying it back. What we’re seeing today is not “news” it’s simply a continuation of the initial credit crunch that has never been dealt with head on.
The reason for this? Nobody knows the correct way to approach the situation. Experts, governments & banker all theorize and procrastinate instead of actually dealing with the situation. We have never been in this situation before. There’s no trust in the interbank and now, investors don’t trust the banks and governments either. Even gold has lost its status as a “safe haven” at this point in time.
The only analogy that is fitting for this situation is a Tsunami. Everyone is on the beach, the water has receded and a thundering wave is towering above our heads. And people are still saying “I think there’s a Tsunami coming.”
Australia and Canada are the only two remaining major economies with AAA status at this point in time. But with all things considered, would it really be that much of a shock if they were to be downgraded? Or would it just be a matter of following suit with the rest of the world?