Do credit downgrades matter? Flip a coin

The threat of a credit downgrade to a country typically spurs panic and dire warnings about the impact to national debt markets. But it seems like the market doesn't always heed the call when ratings agencies actually pull the trigger.

Bloomberg's own data analysis says that in "about 47 percent of cases, countries’ borrowing costs fall when a rating action suggests they should climb, or they increase even as a change signals a decline." In other words, whether the market responds to a credit rating change "may be little different that flipping a coin."

This was evident last year when Standard & Poor's downgraded the United States: It should have made U.S. debt less appealing, but investors instead flooded the market to snap up Treasuries. Similarly, Bloomberg continues, the U.K.  government demanded sweeping budget cuts and other austerity ratings out of fear of a credit downgrade. Moody's downgraded them anyway. But, as in the U.S., the market didn't take the downgrade at face value. Contrary to the warnings by officials, borrowing costs have largely fallen in the U.K. since the February downgrade:


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Brad Plumer · June 21, 2012

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