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More criticism on credit rating agencies

In short: credit rating agencies (CRAs) are companies specializing in investigating credit worthiness (abilty to pay back their loans) of companies and governments. In general concerning certain types of debt obligations like bonds and the debt instruments themselves. Practice is that companies use credit ratings to investigate whether investing in that company would be a good idea or not. But the last couple of years CRAs are primarily known for their ratings of governments and nations, think of Ireland, Greece, Italy and Spain.
In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market.

The Big Three (Fitch, Moodies and S&P) failed to perform in two major events having a major import on the world economy: the Internet Bubble Burst (2002) and the Credit Crunch, where they failed to rate an important bank like Leeman Brothers, (giving a AAA shortly before it went bust thus triggering the credit crunch). Criticism on CRAs and their performances, or even questioning the usefulness of their ratings at large were and are inevitable. (one is as important as others think you are)

In 2003 the U.S. Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the anti-competitive practices of credit rating agencies and issues including conflicts of interest. More recently, ratings downgrades during the European sovereign debt crisis of 2010-11 have drawn criticism from the EU and individual countries.

Considering none of the agencies are as independent as they claim to be (they are all subject to companies paying for their services, one can imagine that it's difficult to be hard on those that 'feed' you. This would make their ratings biased, the least.

July 2011 Angela Merkel suggested Europe, and the EU, are in need of a European counterpart which should be more familiar with the specific situations of the economies in members states.
German chancellor Angela Merkel (link) called Sunday for the creation of a European credit rating agency, on the back of recent discontent over the downgrading of some EU economies. . . . (cut) . . . EU leaders object that Standard & Poor's, Moody's and Fitch are an "oligopoly" issuing self-fulfilling prophecies of doom, greatly aggravating the eurozone debt crisis. (17 Jul 11)
Europe fires back at credit rating agencies (link)

The moves revived calls for the creation of a credit ratings agency in Europe to act as counter-weight in a market dominated by US-based agencies.

“We must break the oligopoly of the ratings agencies,” said German Finance Minister Wolfgang Schaeuble, adding that he wanted to “break” their power and “limit” their influence. . . (cut)  . . . Amadeu Altafaj, the commission’s spokesman for economic affairs, said Moody’s timing was “questionable” and based on “hypothetical scenarios” that contradicted the European Union’s own assessments.

“This is an unfortunate episode and raises once more the issue of the appropriateness of behavior of credit agencies and of their so-called clairvoyance,” he told a news briefing.

US enters war on rating agencies (link) (13 Aug. 2011) . . . The downgrade of the US debt rating for the first time in its history has left the Obama administration with no option but to enter the war. For the first time, the US Treasury department publicly criticised S&P, suggesting that the rating agency‘s estimates of the government’s discretionary spending were 2 trillion dollars too high. The US government is also considering a proposal that would require credit raters to disclose “significant errors” in how they calculate their ratings, as Reuters reported. . . . (cut) . . . Meanwhile, the US Senate Banking Committee is looking into the possibility of holding hearings into the downgrade. Committee chairman Tim Johnson called the agency’s downgrade an “irresponsible move”, which could have a far-reaching impact.
A list of credit rating companies: (links)
A. M. Best (U.S.)
Baycorp Advantage (Australia)
Capital Intelligence (Cyprus)
Capital Standards Rating (Kuwait)
Credo line (Ukraine)
Dagong Global (People's Republic of China)
Dominion Bond Rating Service (Canada)
Egan-Jones Rating Company (U.S.)
Fitch Ratings (U.S./UK)
CIBIL (India)
Japan Credit Rating Agency, Ltd. (Japan)
Moody's Investors Service (U.S.)
Muros Ratings (Russia alternative rating agency) (Russian)
Rapid Ratings International (U.S.)
Standard & Poor's (U.S.)
Weiss Ratings (U.S.)

With the decline of the importance of the traditional large companies and the fast growing economies of BRIC nations (Brazil, Russia, India and China) it's not imaginary that CRAs from those regions will gain influence.

Relate pages on my blog:
Country Risk, country rating, Ireland Rating
Databases offering Debt/credit ratings
Stock rating, debt rating and stock ranking

Sources used: Wikipedia, Athens news, Inquirer Business, The Local - Germany's news in English,

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