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Comparing the Incomparable- Credit Ratings Agencies Revisited

Comparing the Incomparable- Credit Ratings Agencies Revisited

By R. Tamara de Silva

January 17, 2011

Yesterday, Standard & Poor's relieved the Eurozone's bail-out fund, the European Financial Stability Facility ("EFSF") of its AAA credit rating, possibly hampering the fund's ability to contain the European debt crisis. This comes on the heel's of the S&P stripping both France and Austria of their triple-A rating in favor of a rating of AA+.[1][1] The effect of the S&P downgrade may be negative. Ratings agencies exist to level asymmetries in information and evaluate risk but one of their inherent oddities is that they seek to compare things whose differences in scale make them incomparable. Ratings agencies also have conflicts of interests, they often evaluate financial products (like collateralized debt obligations) they do not understand and of course, they seem to lack fixed ways to measure absolute risk and they are at times catastrophically wrong.


[1] The EFSF's ratings are derived from its backers and France and Austria were two of the largest guarantors behind Germany. S&P's downgrade of the EFSF will mean the fund has 440 billion less in Euros than before the downgrade.

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