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David K. Wilson, senior deputy comptroller and chief national bank examiner in the Office of the Comptroller of the Currency, said that members of Congress were "right to worry" about the possible unknown effects of a downgrade.
Rod Lache, an auto analyst at Deutsche Banc Alex. Brown, warned in a research note today that "a rating downgrade for Ford appears imminent" while adding that the company appeared to have insulated itself from the effects of a downgrade by rebalancing its credit exposure in recent months.
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It's just that the effect of a downgrade is out of proportion to the information it conveys.
So the effect of a downgrade on borrowing costs will be more muted.Another charge against the agencies is that ratings of local-currency debt are pointless.
Morgan Stanley has played down the effect of a downgrade, saying only 8 percent of its derivative contracts have rating triggers that could immediately prompt customers to move their business.
The long-term effects of a ratings downgrade, he added, were unknown.
They were less certain, however, what the cumulative effect might be of a downgrade.
And only research departments are to be allowed to end coverage of a company—in the past, this was often done at the behest of bankers who preferred it to the relationship-damaging effects of downgrading a client's shares.
Imagine the domino effect of a sovereign debt downgrade forcing governments, many already beleaguered by servicing public debt, to impose further hardship on a citizenry because of some faceless unaccountable number-crunchers within a ratings agency — people who are removed from the real world that they assess.
Last month, the markets took action, in the form of a downgrade and the possibility of future downgrades that caused the markets to tumble.
And the prospect of a downgrade destroyed Wachovia.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com