Nate Silver of FiveThirtyEight has an interesting post about sovereign public debt default ratings from Standard & Poorâ€™s. He argues that their ratings from five years ago did not reflect the risks that arose with the financial crisis.
Despite their potentially misleading character, the financial system relies on such ratings to be a proxy for probability of default. A bondholder with a good rating should be less likely to default than one with a poor rating, and a highly rated security should be a safe investment, If the ratings produced by rating agencies are not a good proxy for risk, it may be a mistake to continue to give them such an important role within the financial system and financial regulation.
Of course, that raises the question of what to use as a superior indicator for risk.