Fitch’s US downgrade: The principal-agent problem in modern finance
Rating agencies pose risks to financial markets. Investors need to monitor and understand how they work
FITCH Ratings’ downgrade of US sovereign credit from AAA to AA+ highlights a latent principal-agent problem in modern financial markets: Investors have outsourced much of their risk management to the rating agencies.
But the problem goes beyond just risk management and the rating agencies. Before Standard & Poor’s reduced its credit rating for the US in 2011, financial contracts referred to “risk-free” or liquid assets as AAA-rated securities.
Considered “good collateral”, these assets were a requirement in most financial transactions.
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