The failure of the rating agencies

The rating companies like Standard & Poors and Fitch play an unfortunate role in the Greek drama. As we have seen for so many times in the last years, instead of providing a sound rating of a debtor to investors, they exaggerate trends in the markets by incorporating the "judgement" of the markets as a variable into their rating process. "The debtor is downgraded because the markets lost faith in the ability to repay the debt". That is crazy as a rating should reflect the real possibility to repay a debt, not the faith of market participants, which rely themselves on the judgement of the rating agencies.

What could be done? In my opinion, the rating agencies have to disclose their methodology how they determine the rating. The process may not include any market variable, like price or spread. They have to show, that they can obtain from economic variables alone, from balance sheets and profit statements, their assessment. A variable introduced into the model, should remain at least for 3 years in the model. This should prevent to incorporate any short-term or stylish variables into the rating process. Also they have to show, that their process reflects the future ability to repay debt, not the past or current one.

I bet, that it would be very difficult for them to show that to us investors. The result may be an econometric model instead of a sentiment driven judgement, what clearly would be an improvement.