How should one rate the rating agencies? It’s a question often asked by market participants and commentators. Some seem to think that you can evaluate ratings by looking at their impact on market prices. If a rating change is not accompanied by a change in bond spreads – or if bond prices diverge markedly from levels implied by ratings – some see it as a “failure” by the ratings providers. Yet that is the wrong test, says Yann Le Pallec, Executive Managing Director, EMEA, Standard and Poor’s, in this month’s IFR. The real test should instead focus on the correlation between ratings and defaults.
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