The risk free nature of government bonds, one of the cornerstones of the global financial system, has come into question as the global crisis unfolds. One thing is now very clear: government bonds are no longer the risk-free assets they once were. This carries far reaching implications for policymakers, central bankers, debt managers, and how the demand and supply sides of government bond markets function.
One of the earliest take aways from the global financial crisis was the importance of access to information for effectively functioning financial markets. And, in that regard, credit ratings can serve an incredibly useful role in global and domestic financial markets. But, in practice, credit ratings have inadvertently contributed to financial instability. To be fair, the problem does not lie entirely with the ratings themselves, but with overreliance on ratings by both borrowers and creditors. In one of the background papers for the Fall 2010 Global Financial Stability Report that John Kiff prepared with IMF colleagues, they recommend that regulators should reduce their reliance on credit ratings. Markets need to end their addiction to credit ratings.