Charisma of Credit Rating Agencies

24 June 2012

here was a time when the world's top credit rating agencies, S&P, Moody's, and Fitch, were highly regarded in the financial world. A lot of people looked up and trusted their assessment on various securities. Their triple A rating was as good as gold.

I noticed that things changed significantly following the Asian Financial Crisis in the mid 1990s where these guys simply failed to measure up the real extent of the problems plagueing the region, not to mention the actual contagion impact that went all the way to Russia.

This time around, for many years, they did not get it with the Eurozone where somehow a lot of investors too treated Greek debt to be practically as good as that of Germany. That simply did not quite make much sense.

To top it all up, practically every professional investor is aware that their most recent downgrades of 15 major global banks came years too late. The financial market even booed them further by pushing up the share prices of many of these banks. That was to say that the downgrades have long been priced in.

Getting back to the basics would mean that credit ratings are supposed to deliver a large extent of accurate future expectation. That clearly has not been the case for many things. If this is to continue, it is possible that these agencies will be finally deemed irrelevant and in an extreme case, be driven out of business once their credibility is crushed. It will then be really ironic that these prestigious, once highly revered organizations are increasing losing trust of the financial market.

Fortunately not all is lost. They could still repair their reputation by quickly getting back on their radars and really place appropriate ratings on various securities and prove to the market that they could to a large extent anticipate significant events. Of course in this highly uncertain, interconnected global economy, things move rapidly and nothing could be completely predictable. But at least, they should be able to get more things right and the market could once again place more trust on them.

They could, for instance, now look closely at India where their currency has recently been in a freefall. For sure there should be entities there that warrant changes in their ratings, whether upwards or downwards due to the shifting economic landscape over there, depending on each entity's extent of exposure.

And they should issue more than usual revisions of ratings to at least show to the market that some serious work is being done so that their ratings more appropriately reflect the present realities, prospects of those entities or even sovereigns, for that matter.

Whilst it is true that professional investors should do their own homework, it would still be nice to still be able to have a glance at the ratings and know that at least to some extent, it could be trusted.