By James Phillipps | 13:54:07 | 05 May 2010
Pimco’s bond guru Bill Gross (pictured) has slammed rating agencies blasting their ‘timidity and lack of commonsense’.
His ire was raised after Standard & Poor’s downgraded Spain one notch from AA+ to AA last week with the threat of a further downgrade if the Spanish government did not act soon to stabilise its finances.
‘Oooh so tough and believe it or not Moody’s and Fitch still have them as AAAs,’ he says. ‘Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!’
In fairness, Gross does recognise the need for ratings agencies given that a number of organisations need to justify the quality of their portfolios by law, but he is scathing about their performance and role in allowing the Southern European states to run up such large debts.
‘I come not to bury the ratings agencies, but to dismiss them. Firms such as Pimco with large credit staffs of their own can bypass, anticipate and front run the agencies benefiting from their timidity and lack of commonsense,’ he says. ‘They have brazenly sold their reputations for unbiased judgement to the very companies they were standing in judgement upon. Don’t bury them however, like vampires in the dead of the night they will outlast us all.’
Gross is not alone in treating the ratings agencies’ reports with a healthy dose of scepticism and the fact that Spanish bonds are trading so far below their rating indicates how widespread this view really is.
M&G head of fixed income Jim Leaviss has been another long-term critic. He points out that in the high yield bond market, ratings agencies have cut their default forecast from 20% to 5% on the back of lower spreads despite their being little improvement in revenues or profit.
‘It does make you wonder what the point of the rating agencies is,’ he says. ‘If their ratings are largely reflecting what the bond market is telling them, who needs them?’