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Rating Agencies - Friends or Foes?

Talks about sovereign debt default by Greece, followed my a few other countries, are gaining credibility. The ECB is likely to start dropping interest rates fast, and in the not very far future we might see close-to-zero rates. With inflation at anything higher than the ECB rate, essentially they are paying for people to take the Euro.

What I am interested in right now is how the ratings agencies that are followed and very respected by the investment 'community' as a tool to monitor investment risk (in spite of catastrophic misjudgements in the past), may be turning into one of the investors worst enemies.

"A banker will lend you an umbrella when it is sunny and take it away when it starts raining. A ratings agency will ensure it rains as soon as there are enough clouds." 

Well, rating agencies can and do make the rain pour when it is cloudy. i.e.,  Their actions result in higher costs of borrowing when what is necessary is the opposite, thus ensuring that the storm occurs. Sure, the borrower needs a bit of a 'wake up call' to take responsible action, but higher interest rates or being cut from the money market is hardly the solution.

So far such 'weather forecasts' are welcome warning for investors that didn't 'get in', but very bad news for existing lenders, and specially holders of long-term bonds.

Next the herd (a.k.a. investors) cut the money supply either by not buying debt or pricing it sky high, the borrower has no option but adopt high impact austerity measures that eventually choke the economy, which is what is happening in Greece and Ireland. Of course, before the end of the road the borrower is stripped of any valuable assets to ensure maximum damage.

And then comes the default/restructuring/haircut. The borrower at this stage is devoid of any strength at this stage, and the lender takes a dreaded hit.

What I question is how can the herd mentality and the advisory services of the ratings agencies be regarded as valuable market monitoring resources when their actions actually trigger market overreactions that eventually go against the investors interests.

If only investors did their own due diligence before investing, instead of relying on others' rather unreliable views....
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