NEW YORK — The rating agencies that sort good investments from junk are once again injecting fear into financial markets.
Only this time, it’s for warning investors about a possible threat — Europe’s debt crisis — rather than for failing to see one coming.
Why do their words carry so much weight? These are the same firms that gave safe ratings to high-risk U.S. mortgage investments that later imploded and caused the financial crisis. Those failures raised doubts about how much the assessments of rating agencies such as Standard & Poor’s, Moody’s Corp. and Fitch Ratings are really worth.
Yet less than two years after the crisis peaked, investors still take them seriously. Case in point: S&P on Tuesday cut Greece sovereign debt to “junk” status and dropped Portugal’s down two notches. Those downgrades sent financial markets from London to Hong Kong plunging.
Investors feared that more European countries would be dragged into the region’s debt debacle. In the U.S., the Dow Jones industrial average sank 213 points Tuesday before recovering Wednesday and Thursday.
A big reason the agencies still carry influence is that many institutional investors — from central banks to pension funds — require safe ratings on the debt of countries, firms or securities they invest in.
A downgrade from S&P or Moody’s might not tell investors anything they don’t already know. But it can force a central bank or investment fund to shed the downgraded investment. That’s why it can roil financial markets.
