CFA Charterholders to Credit Rating Firms: Vote of No Confidence

As it became clear last week that the U.S. fiscal crisis was reaching a boiling point in Washington, we issued a brief survey to the CFA Institute global membership. We wanted to find out more about how our members viewed prospects for the U.S. government debt markets, as well as their perspectives on the performance of a major player in the ongoing debt-ceiling debate: credit rating agencies. Over 5,000 members responded to the survey, with about 1,000 of those respondents sharing additional comments.
 
Comments received on credit rating agencies were fairly uniform. Most believe that the rating agencies aren’t taken very seriously in the marketplace given their poor performance in rating structured mortgage products in the lead-up to the financial crisis. And most felt that the agencies tended to act too late, when the markets had already digested the relevant news. Only one-third felt that CRAs are doing an appropriate job in terms of rating sovereign debt. Despite the feeling that CRAs are not taken seriously, nearly two-thirds felt that a credit downgrade of U.S. debt from AAA to AA rating would have at least a moderate impact, sending bond prices down and interest rates higher.
 
Now that a budget deal is in sight, the question turns to whether the agreement demonstrates enough progress in reducing U.S. deficit spending to avoid a downgrade. Whether the U.S. has gotten its fiscal policy turned in the right direction will be debated for many months in the lead-up to the 2012 presidential and congressional elections.
 
Another question sure to linger is whether rating agencies are still relevant and necessary in the global capital markets. Indeed, a significant percentage of survey respondents were concerned the U.S.-based CRA firms were biased in their ratings of U.S. governments, which calls into question whether the rating agencies will (or should) be removed or replaced in the process of evaluating sovereign debt. 

What do you think? Where do we go from here? Please comment below.