Are you in the mood for a Moody’s credit rating upgrade?

In a press release on Feb. 12, 2009, a credit rating agency (Moody’s) maintained unchanged the Philippine sovereign debt rating at “positive,” which was upped from “stable,” about a year earlier.

Interestingly, Moody’s claims that a “key concern” is OFW remittances, which they state “may decline” in 2009.  In a disclaimer, Moody’s claims that credit ratings represent only “opinions” of credit risk, defined as “the risk that an entity may not meet its contractual, financial obligations as they come due and any estimated financial loss in the event of default.”  Further, such credit risk is supposed to exclude “any other risk,” such as “liquidity risk, market value risk, or price volatility.”  Such a disclosure seems rather strange.  If there is a risk of default, surely such risk is highly correlated with liquidity risk, market value risk, or price volatility.  After all, interest rates are nothing but bond prices, and volatility of interest rates is directly tied with liquidity and market value.

There is an Alice in Wonderland atmosphere in the work of credit rating agencies, something that should make investors, as well as taxpayers, take pause.  It seems that ratings are a means to help sell bonds, disavowals notwithstanding.  Moody’s states that it “issues its credit ratings with the expectation and understanding that each investor will make its own study and evaluation of each security that is under consideration for purchase, holding, or sale.”  But the reason investors check credit ratings is rather simple: As an estimate (“opinion”, supposedly informed) of default risk, a credit rating is a key ingredient in any decision to invest or disinvest.

For a more fundamental look at credit ratings, see my earlier post summarizing an IMF study on this matter.

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