December 08, 2010

Sometimes bad credit ratings are pure bliss.

As a citizen from a country that no matter how bad the credit ratings were they should always have been worse so as to help us to stop our governments from taking on debts, and therefore quite knowledgeable about the bliss that sometimes follows bad news, I cannot but agree with John Kay´s “Learn to love the candid bearer of bad news”.

The fundamental problem with using credit ratings is that if they are 100% right on the dot then a financial transaction based on it would be just but would not provide any party with a profit. In order for credit ratings to generate profit, for a borrower or a lender, for a buyer or a seller, they have to be wrong… and to blindly base your regulations on something that needs to be wrong in order to generate profits does not sound like the wisest thing to do.

PS. You might like to read “The riskiness of country risk” which I published in 2002.