Rating agency threat can still rattle markets

Why do the credit rating agencies still merit Good Housekeeping seal levels of respect? The markets have gone all ker-phooey because Standard and Poor’s has threatened to downgrade the ratings on UK debt.

Brows are furrowing and told-ya-so’s reverberating on both sides of the pond this morning, after S&P issued a formal warning that the United Kingdom could lose its cherished triple-A if the government doesn’t move to rein in yawning deficits.

via With U.K. AAA Rating In Jeopardy, Is U.S. Next? – MarketBeat – WSJ.

As far as I can tell, the announcement doesn’t reveal anything new about the state of Great Britian’s deficits and spending (which are impressive relative to GDP). But the Dow Jones reaction, down 1.62% at midday, signals that the opinions and the ratings agencies do matter a great deal. Part of that is habitual and part of that is structural. Markets are in the habit of giving credence to what the ratings agencies announce. And investors are often required to sell securities if they slip below certain ratings levels or at least to re-balance their portfolios to meet certain investing criteria.

Also behind the selling: Everyone is wondering if the triple-A rating of the US government is in jeopardy. It’s a natural question: deficits are piling up and major debt investors like China and Japan are slowing their investing in US govvies. China, in fact, has been stockpiling commodities.

But that question has been hanging in the air for sometime. Investors need to do some fundamental analysis of their own. As MarketBeat notes, US deficits are growing in part because the government is shoring up investments in what were once deemed to be triple-A mortgage securities.

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