S&P: Substandard and porous

But this is essentially what S.&P. does. Rather than downgrade (or upgrade) a country by several notches, even when there is abundant to support it, they instead do so in stages. Greek debt, for instance, has been downgraded seven times since January 2009, as S.&P. has slowly caught up with the grim realities that investors had long ago perceived.

I suspect the reason that S.&P. behaves this way is because they know that their ratings can have reverberations on the market and are trying to avoid a sudden downgrade that might induce panic.

But in so doing, they are violating their mission of providing the most earnest and accurate assessment of a country’s default risk at any given time. A country that is downgraded from AAA to AA is riskier, in S.&P.’s view, than one that was just upgraded from A to AA — even though they now have the same rating — since the former country is likely to be downgraded again and the latter is likely to be upgraded again. S.&P. knows this, and smart investors know this. But they won’t tell you this because dumb investors might get spooked, which could rattle the markets.

A more cynical view is that S.&P. is playing the role of the schoolmarm, looking for excuses to reward or punish countries based on good behavior — and that this is getting in the way of their objectivity.