Wednesday, May 5, 2010

PIMCO’s Gross Says Rating Agencies No Longer Serving Valid Purpose for Investment Companies

PIMCO, which runs the world’s biggest bond fund, the PIMCO Total Return Fund, said on Wednesday that big credit rating agencies are no longer useful, since companies as big as PIMCO are quicker to anticipate shifts on credit quality of debt. Reuters has reported that PIMCO's managing director, Bill Gross, wrote in a May Investment outlook through company’s website, [ The credit rating agencies] ”no longer serve a valid purpose for investment companies free of regulatory mandates.”

Gross says that recent downgrade of Spain by Standards and Poor’s shows how timid and slow the three big credit rating agencies can be in downgrading sovereigns. On April 28, S&P cut Spain's rating one notch on the economic view. “S&P just this past week downgraded Spain one notch to AA from AA+, cautioning that they could face another downgrade if they weren't careful...And believe it or not, Moody's and Fitch still have them as AAAs,” Gross wrote.

Gross said that currently Spain’s unemployment rate is twenty percent and its current account deficit has touched the ten percent mark. As a result, government bonds in the market are trading in a way as if they were rated at Baa levels, which is in the lower echelons of investment grade. “Their warnings were more than tardy when it came to the Enrons and the Worldcoms of ten years past, and most recently their blind faith in sovereign solvency has led to egregious excess in Greece and their southern neighbors,” Gross wrote.

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