Stop Loss Indonesia: What's in an AAA? Use Your Judgment, Investors Say

In a world where the United States no longer has a AAA and big economies like France and Germany risk losing theirs, investors are increasingly relying as much on their own judgment of top-bracket creditworthiness as on the opinions of ratings agencies.

While two of the largest agencies, Moody's and Standard & Poor's, have been criticized by governments and banks for recent downgrades and threats of ratings cuts, investors say loss of the cherished AAA no longer means an instant "sell".

Critics fear the credit ratings industry is at risk of making rash calls as it fights to restore its credibility after grave mistakes in evaluating billions of dollars of subprime mortgage debt in the run-up to the 2008 financial crisis.

Once the first port of call for funds assembling new portfolios, managers are increasingly sidelining agencies in favor of their own research and are consulting clients to decide if they remain comfortable holding an investment, whether it comes with the top rating or not.

"More and more we are having conversations with clients, as opposed to selling something instantly that falls below that criteria," said Jennifer Gillespie, head of money market funds at Legal & General Investment Management, which runs around 15 around billion pounds ($23.4 billion) of assets in cash and liquidity strategies.

"You cannot be so black and white because the average credit rating of money-market instruments is not AA or AA-plus, it is getting closer to A," she said.

Speculation that France faces an imminent downgrade of its AAA rating reached fever-pitch on Wednesday, prompting a sharp late-day drop in the share price of French banks including Societe Generale [SOGN.PA 16.545 0.24 (+1.47%) ]and Credit Agricole [CAGR.PA 4.043 0.003 (+0.07%) ].

Policymakers have also stepped up efforts to lessen the impact of the ratings agencies, with Bank of France head Christian Noyer saying on Thursday that their arguments were more "political" than "economic" and a French downgrade would not be justified.

Last week, Standard & Poor's put the euro zone's remaining six AAA-rated governments on watch for a possible downgrade and said the AAA rating of the 27-nation European Union was also under review.

Perceived Irrelevance

In Europe's financial sector, where bank ratings are on a downward slide as credit markets shun eurozone risk, the label awarded to each bank has become even less influential thanks to pledges of financial support from the European Central Bank.

With banks of all stripes now expected to tap the ECB's unprecedented three-year funding facility, investors say credit-rating downgrades have even less relevance because banks can now bypass the bond market entirely, in stark contrast to times where their credit label was crucial to their access to capital.

"If banks are no longer planning to issue bonds on the market for a long period of time, credit-rating downgrades have no impact," said Yannick Naud, portfolio manager at Glendevon King Asset Management.

While a strong rating still carries weight when it comes to attracting corporate clients or signing a derivatives contract, the fact is that even large and strongly rated European banks like BNP Paribas [BNPP.PA 27.745 -0.18 (-0.64%) ] have already had to turn to the ECB for some funding and are expected to continue to do so in 2012.

"Banks are being offered 'open bar' for periods of up to 36 months," said Francois Chaulet, fund manager at Montsegur Finance. "Clearly the banks are going to fall over themselves to get as much as possible."

This helps explain why some French bank shares actually ended the day higher on Friday, up by almost 3 percent, after Moody's downgraded BNP Paribas, Societe Generale and Credit Agricole, citing the eurozone debt crisis' impact on bank funding markets.

"There's extreme support from the ECB," said a London-based analyst. "These downgrades are much less relevant than before."

The perceived irrelevance of credit ratings also comes at a time of volatility and uncertainty for sovereign capital markets.

Some sovereigns like France seem to have accepted the imminent loss of their AAA rating, while others like the Netherlands have promised to take extra austerity measures to preserve it, Glendevon King's Naud said, pointing to a lack of co-ordination in restoring investor confidence in Europe.

But for some investors, confidence in their own abilities to pick worthwhile investments is far greater than the influence the agencies now exert on their strategies.

"Generally, we don't look at what they say they are just irrelevant to how we invest," Tamara Burnell, head of Financial Institutions and Sovereign Research at 194 billion pound fund firm M&G.

"We have invested the resources to ensure that we do not need to rely on anyone's external analysis. That is what our clients pay us for...it would be completely wrong of us to abdicate that responsibility," she said.