Rating Agencies, the Ultimate Advisor?

Firstly, a timeline of events of Greece debt crisis since Prime Minister George Papandreou's socialist PASOK party won snap elections last October:

 1. October 2009 - The new government discloses the 2009 budget deficit will be 12.7 percent, more than double the previously announced figure.

 2. November 2009 - It also sees public debt rising to 121 percent of GDP in 2010 from 113.4 percent in 2009. EU forecasts on Greece for 2010 are worse, with the deficit seen at 12.2 percent of GDP and national debt rising to 124.9 percent of GDP, the highest ratio in the EU.

 3. December 2009 -- S&P on December 7 puts the country's A- sovereign rating on negative watch.

 4. On Dec 8, Fitch Ratings, which had cut Greece to A- when the government revealed the higher deficit, cuts Greek debt to BBB+ with a negative outlook.

 5. Standard & Poor's cut Greece's rating by one notch on December 16, to BBB-plus from A-minus

 6. Moody's cuts Greek debt to A2 from A1 on December 22 

Secondly, the following table plots euro against dollar from Oct 2009 to today.

The numbers indicate the timing of the above event.

Ok, let’s now discuss a bit.

The first two events are disclosures of the fiscal problems in Greece, and they are supposedly very negative news of the economy. Following Event 1, there was actually a downward trendline which reflected increased concern (blue line). The Event 2 was a negative signal as well, but the euro managed to enter the last month of 2009 with a strong support level (red line) and the battle between bulls and bears didn’t finish yet.

Then those rating agencies started to give out their opinions, albeit as late as they usually did. This time, however, everybody started to sell euro in a panic. A downward trend closely correlated to the downgrading decisions (green line).

With additional fears about other euro members, euro continues to fall in the first months of 2010 (yellow line).

I have to say the subprime crisis makes me dislike those rating agencies. They failed to predict the problems and only made things worse when they downgraded those troubled securities. As a result, another round of panic was brought. This time, during the Greece debt crisis, they just did it again.

However, investors and traders always positioned rating agencies as the ultimate advisor. Although real economic events (event 1 & 2) caused concerns, the majority reacted fully when rating agencies started to talk and the time lag lasted for weeks. Furthermore, when the majority relied on rating agencies, an individual investor could only follow their advice to avoid substantial loss.

As long as you can’t outsmart the rating agencies, all you can do is adhering.