If a rating falls, does it make a sound?

Do global credit ratings agencies have anything to tell the market that it cannot find out for itself? The jaded bond investor’s answer would be no. How else to explain the lack of price reaction to such seismic events as the UK’s loss of its gold-plated AAA status or Portugal’s return to the investment-grade club? The minimal market reaction suggests government ratings could be scrapped without much protest.

The reason they will stick around is that no one has yet come up with an alternative. Attempts to defang the agencies after they missed the risks in collateralised debt obligations, and were then accused of accelerating the European debt crisis, fell flat.

Agencies are still paid by the organisations they rate — a clear conflict of interest — and the sector is still dominated by three big companies: S&P Global Ratings, Moody’s and Fitch. Their views remain a key benchmark by which investors allocate funds and the alphabet soup they use to indicate creditworthiness has not changed.

There is also evidence to suggest that their ratings do offer markets new information on sovereign bonds — even if knee-jerk price reactions are missing. Looking at credit default swap spreads on 55 sovereign bonds between 2005 to 2013, the Bank for International Settlements has found that spreads noticeably respond in the three weeks after a ratings downgrade event.

The nuance missing from previous analysis is that spreads react more to a change in outlook than a change in rating. Bad economic news made public can move bond prices before credit agencies place sovereign debt on negative outlook, but an actual outlook announcement will still cause a rise in credit default swap spreads, particularly for bonds just at or just below investment grade.

Regulators should still be more vigorous in expanding the universe of ratings agencies. But the argument that the crisis diminished credit agencies for good lacks credibility. London, March 15