S&P's Ratings Are Worthless

Don’t put too much stock in Standard & Poor’s much ballyhooed credit ratings—because they’re astonishingly bad. Nate Silver of the New York Times ran an analysis on S&P’s ratings from five years ago, and found that, had you heeded them, they “would have told you almost nothing about the risk of default today.” Ireland, for example, got a AAA rating through March 2009—today, the market believes there’s a 40% risk of default there.

In fact, historically you’d be better off betting against S&P’s ratings—given two countries with the same market-priced risk, bet on the one S&P rated lower. Silver notes that its ratings correlate more strongly with the Corruption Perceptions Index—a subjective ranking often accused of cultural stereotyping—than to any hard economic data. That’s “troublesome,” Silver writes, because “it suggests that S&P is making a lot of judgment calls about countries they have no particular knowledge about.” (More Standard & Poor's stories.)