Calculated Risk reports that S&P is increasing its forecasts for losses on subprime mortgages again. As I’ve said before, in principle this means that their expectations about the economy are worse today than they were yesterday. They’re not just saying that defaults will go up; they’re saying that they will go up by more than they thought before today.
I previously discussed why I think this is weird, and there are a number of good comments to that earlier post. My theory that they are trying to spread out the deterioration of their forecasts over several months to save face got some support. q and others explained that rating agencies lag the economy because they base their forecasts on published economic data. That may be true, and it may be the best explanation for what is going on, but if so it seems like a condemnation of the rating agencies, since their job is to estimate the likelihood of default, and one of the inputs to their models should be the economic situation. (Or maybe their job is to estimate default likelihood assuming “normal” economic conditions, and it’s up to the investor to adjust accordingly.)
Note that these are their macroeconomic forecasts, not revisions to ratings of specific bonds, so the bond-rating schedule isn’t the driving factor here.
By James Kwak