EU slams ratings agencies after Portugal downgraded | ReutersEuropean politicians accused credit rating agencies on Wednesday of anti-European bias after Moody's downgrade of Portugal's debt to "junk" cast new doubt on EU efforts to rescue distressed euro zone states without debt restructuring.
European Commission President Jose Manuel Barroso said the decision to cut Lisbon's rating by four notches so soon after it became the third country to receive an EU/IMF bailout was fuelling speculation in financial markets.
The criticism is not necessarily unfair. The timing of the decision can certainly create perceptual issues. It might even trigger confidence issues that could fuel a self-fulfilling prophecy via market shifts that lead to a spike in interest rates/increased financing difficulties.
IMO, the problem isn't so much with the rating but the process of frequent, incremental changes in the ratings. That process exacerbates uncertainty and undermines the credibility of the ratings. A far better practice would be to fully estimate a country's credit risk based on current conditions and the likely outcome over the next 12-24 months and then set the credit rating. While such an approach would, in the case of Portugal, have led to a deeper initial cut in that country's credit rating, it would eliminate the ad hoc, reactive practice of frequently adjusting the rating to the point that one can legitimately ask whether the current rating really has any merit. Unfortunately, at this time, there is little indication that any of the major ratings agencies are interested in providing ratings with a goal that the ratings have a shelf-life of sorts and, thereby, can provide a degree of certainty over the next 12-24 months.