by Roger Koppl
The Christian Science Monitor reports that Moody’s is considering downgrading US government debt. (HT: Mario Rizzo) Is that a credible threat? Moody’s is one of ten “Nationally Recognized Statistical Rating Organizations” (NRSRO) officially recognized by the SEC. Moody’s, S&P, and Fitch are the big three and do most of the rating. Would they downgrade the same entity that ensures their continued monopoly power? Why would they make such a threat in the first place? What is the public choice explanation for Moody’s (empty?) threat?
March 18, 2010 at 8:24 pm
Roger has gone to the heart of the matter and I suspect he is correct. There is an offsetting effect: the loss to Moody’s brand name capital if they do not downgrade. We’ll see.
March 18, 2010 at 10:02 pm
Great question, Roger. It may be that they will “consider downgrading” for a long time to come, thereby reducing the risk to brand name that Jerry points out, but not actually do it. There is a subtlety to these things, I suppose.
March 19, 2010 at 1:12 pm
Well, I have to say, Moody’s statement is kind of obvious: “Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating.”
March 22, 2010 at 12:39 pm
Perhaps they are trying to maintain their monopoly status. Many are pushing for a more competitive ratings industry:
http://www.ritholtz.com/blog/2010/03/on-to-financial-reform/