Since the New York Times has disconnected my online login from my print edition, I can't link to anything at the New York Times. But James Kwak reads Nate Silver:
S&P Ratings Destroy Information: Nate Silver has the best article I’ve seen yet on S&P’s sovereign debt ratings, and the summary is that it isn’t pretty….
- Debt-to-GDP ratio alone is a better predictor of default risk than an S&P rating (meaning that the rating subtracts information provided by the debt-to-GDP ratio).
- S&P ratings have almost no correlation with future default risk.
- S&P rates European countries higher than other countries, all other things being equal—and look where that got us.
- S&P ratings are serially correlated, which means they incorporate new information especially slowly.
Hopefully this will be one more nail in the coffin of regulations that incorporate NRSRO ratings.
