Editor's letter

It's been a bad month for Moody's. First the rating agency, which was once famously described as one of two superpowers in the world today (along with the US), upset bankers by backtracking on planned changes to its hybrids methodology. But that turned out to be a minor tremor compared with the Richter Scale 10 earthquake unleashed by its new bank ratings methodology. The agency unveiled its new analysis, which takes into account systemic support for banks - for example from parent groups or governments - on February 23. Up to 200 banks are expected to be upgraded by the time the methodology is fully rolled out, including Icelandic banks Kaupthing, Landsbanki and Glitnir, which won multiple notch upgrades to become triple-As.

Moody's could hardly have expected the fury that would follow. Analysts, usually restricted in the outrage they can vent in arid credit research reports, seized the opportunity to slam the agency. Royal Bank of Scotland said the move brought "unspeakable horror"; Merrill Lynch described it as "perverse"; and CreditSights, in a report entitled Moody's makes Aaas of itself, said it would stop using Moody's bank ratings altogether.

Investors need ratings stability, and there are obvious instances in which the new methodology seems difficult to justify. But Moody's is not in the habit of creating new rating methodologies for its own entertainment. If the agency believes default probability for banks is currently overestimated, that should at least be considered as a possibility. We'll find out whether they're right the next time there is a bank failure. In the meantime, the final judgment on Moody's decision will be delivered by the market: if spreads fail to narrow permanently on entities that have benefited from massive upgrades, then Moody's really will have been judged to have lost the plot.

- Nikki Marmery, Editor.