NEW
YORK – Recent market volatility – in emerging and developed economies
alike – is showing once again how badly ratings agencies and investors
can err in assessing countries’ economic and financial vulnerabilities.
Ratings agencies wait too long to spot risks and downgrade countries,
while investors behave like herds, often ignoring the build-up of risk
for too long, before shifting gears abruptly and causing exaggerated
market swings.
Given
the nature of market turmoil, an early-warning system for financial
tsunamis may be difficult to create; but the world needs one today more
than ever. Few people foresaw the subprime crisis of 2008, the risk of
default in the eurozone, or the current turbulence in financial markets
worldwide. Fingers have been pointed at politicians, banks, and
supranational institutions. But ratings agencies and analysts who
misjudged the repayment ability of debtors – including governments –
have gotten off too lightly.
In principle, credit
ratings are based on statistical models of past defaults; in practice,
however, with few national defaults having actually occurred, sovereign
ratings are often a subjective affair. Analysts at ratings agencies
follow developments in the country for which they are responsible and,
when necessary, travel there to review the situation
Read more at http://www.project-syndicate.org/commentary/financial-early-warning-system-by-nouriel-roubini-2015-08#i0wtiAdvcCR4fAsL.99Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
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