Following the recent downgrade of Cypriot and French government bonds, the criticism of the rating agencies by governments were inevitable. Governments need to maintain the confidence of the capital market through their bonds, and, therefore, when cornered, have little option but to discredit the rating agencies that deem their financial products as risky.

Nevertheless, Mervyn King’s recent point that investors should rely on rating agencies less is fundamentally sound.

But are we overlooking their true function?

The function of rating agencies is to inform the financial system of the risks of investment products and to help investors build a picture of whether they should stay away from any one single product, corporation or country.

To blame the rating agencies as a prime cause of the current political or economic situation is wrong. We may dislike rating agencies but they have an obligation to draw the market’s attention to the risks involved in investing in a particular project. So when faced with the question, are ratings agencies still useful, the answer is that for short-term concerns, yes, they still play a valuable role.

As I have explained in previous posts, we have put too much emphasis on short-term investment and are now paying the price. Our need is to look far more long term. The long-term outlook is not the concern or the function of rating agencies. They are not geared up to assess what is essentially a socio political question. Nor are they are moral guardians of where we should invest our money. Rating agencies simply allow certain types of stakeholder to make better-informed judgements on short-term financial products. That is all that rating agencies can do. So if we ask ourselves whether the ratings agencies are useful in a long term context, the answer is no.