Although sovereign credit ratings by the big Credit Rating Agencies do have a small impact on borrowing cost, their ratings should still be taken with a grain o

Although sovereign credit ratings by the big Credit Rating Agencies do have a small impact on borrowing cost, their ratings should still be taken with a grain of salt. Take a look at this study by the New York Fed. http://www.newyorkfed.org/research/epr/96v02n2/9610cant.pdf http://www.newyorkfed.org/research/epr/96v02n2/9610cant.pdf In particular on page 10 table 8 you can see the additional impact that a credit rating upgrade or downgrade has on borrowing cost. You could also read throughout the paper and in the conclusion that a lot of what determines a sovereign credit rating is correlated with publicly available macro indicators (i.e. the market was already moving in that direction anyways). Take a look at page 9 chart 2 to see the direction that spreads are moving before an after a ratings announcement. My point is that Ratings agencies don't swing a huge sledgehammer; its more like a small mallet. The author of the article is right you should be skeptical of the incentives behind these ratings decisions but you also shouldn't fear them.