July 16, 2011
The Washington Post told readers that the credit rating agencies are threatening the United States with a downgrade if there is not a deal to reduce projected deficits in the near future. The article rightly pointed out that these credit rating agencies rated hundreds of billions of dollars’ worth of subprime mortgage-backed securities as investment grade, although it attributes this inaccurate rate to misjudgment rather than deliberate corruption. Since the credit rating agencies received tens of millions of dollars for their ratings, and people within the organizations did raise questions about the mortgage-backed securities to which they were assigning investment-grade ratings, it is difficult to see how corruption can be ruled out as a possibility.
It also would have been worth mentioning that markets have not always responded to the downgrading by the rating agencies. In particular, Japan continues to be able to borrow in capital markets at extremely low interest rates (1.1 percent on 10-year bonds) in spite of having been downgraded by both major credit rating agencies.
Also, it would have been helpful if the Post had more clearly sourced the article. Specifically, the article tells readers:
“On Thursday night, S&P insisted that Washington must conclude an agreement to cut the deficit by $4 trillion or face the consequences of a potential downgrade.”
The source of this threat is not clearly identified.
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