Wanted to share my friend's explanation on ratings agencies

S&P and Moody's access the ability of borrowers' capabilities to pay back to the investors - that is how they rate the countries and companies - if they rated Portugal bonds as junk - it only means that after analyzing the counties deficits, inflation, revenues, potential investment, growth rates, they believe that it is highly possible that Portuguese government might not be able to pay the face value and the coupons for the bonds issued - this makes the yields* on the bonds go real high - investors consider junk bonds very risky investments and hence demand higher returns for the risks they take.

As apposed to the AAA bonds, the returns are not high as the risk involved is also not high - so, the initial price an investor pays is inversely proportional to the yields.

Having said that - yes, rating agencies create a speculation in the market - both equities and fixed income - as the ratings drive the yields* and the stock prices. Although for me, they warn the investors who otherwise would consider an investment a less risk/high risk - helps them diversify their portfolios...

My question: Buying unsafe debt because of a higher yield* means you are purchasing a debt that you know will not get paid back. So who ends up taking the fall?

*Yields are interest or dividends, the income on your return. The riskier the bet, the bigger the return.