Do Moody’s downgrades matter?

By Felix Salmon
April 14, 2009

Can anybody tell the difference between a level and a direction any more? Not at the FT, it would seem, which ran a story yesterday under the headline “Credit quality of global groups at 25-year low”. Here’s how it begins:

The credit quality of global companies has deteriorated to levels not seen for more than a quarter of a century, according to Moody’s Investors Service.

The ratings agency said the ratio of companies having their credit ratings cut versus the number of companies being upgraded – an indicator of declining credit quality – had reached its highest level since 1983.

Of course, just because the rate of decline of ratings is at a 25-year low does not mean that the absolute credit quality of global companies is at a 25-year low.

And even the rate of decline doesn’t seem to be all that bad, once you read on:

During the first quarter of 2009, the rate at which borrowers were having their ratings cut reached 13.8 per cent, highlighting the negative credit climate in the first part of the year, analysts at Moody’s said.

“This downgrade rate is higher than pre-economic crisis figures,” said Jennifer Tennant, Moody’s analyst. For the whole of 2006, the downgrade rate was 10.2 per cent, and the average rate from 1983-2009 was 12.5 per cent per year.

All of these numbers seem to be annualized rates, and if the downgrade rate was 10.2% in 2006, at the height of the Great Moderation, then a rise to just 13.8% today seems positively modest — especially when the long-term average is 12.5%.

But the story is confusing: it goes on to say that the long-term upgrade rate is just 7.9%, which would seem to imply that on a net basis, credit quality has been deteriorating steadily for a quarter of a decade at least, with downgrades nearly always outnumbering upgrades. Is that really true? After its first two paragraphs, I don’t trust this FT story to enlighten me on such matters.
And more to the point, does anybody even care what Moody’s thinks any more? Wouldn’t it be better to just look at default rates and credit spreads, rather than ratings, which are horribly lagging indicators even at the best of times?


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

Not actually knowing the answer, I would think that corporations that get downgraded to Default might not then be later upgraded. It’s also possible that upgrades would be by larger jumps than downgrades, but that goes against my preconceptions.

Uhm, no, Felix, it would not be better. As I commented before, ratings are virtually the only publicly available, relatively independent source of credit information. Not having rating would make the markets materially more opaque: I assume you would agree that would be a negative.

As for rating being a lagging indicator, I note you are proposing using default rates instead. Now, if there ever was a lagging indicator…

If you’ve read “Dear Mr Buffet”, you might have come to the conclusion that I have, all AAA ratings have to be viewed with extreme skepticism. The ratings agencies have demonstrated their lack of independence and/or competence, which one I don’t care. What Ferengi rule of acquisition was it, 111? (My son is into DS9 now) Listen to all, trust no one.

Posted by AmericanFool | Report as abusive

There really are more downgrades than upgrades. We certainly build that into our long-term real-world models, and it’s consistent with the usual pattern shown in the regular Moodys reports on credit rating migration. Since there are frequent new issues and frequent exits from the bond market (mainly by default or by maturity), there is no mathematical need for the number of upgrades to equal the number of downgrades.

Posted by DGt1 | Report as abusive

I am a commercial credit rating expert and the only way for them to regain any credibility is to “show the why” behind their rating … be transparent.

Rate the “5 Cs of Credit” separately to show those individual opinions.