The "Big Three" credit ratings agencies - Moody's Investment Services, Standard & Poor's and Fitch Ratings - have certainly been active stamping their upgrades and, more likely of late, downgrades on everything from global companies to individual nations. Now, a global panel of regulators and economic officials, many incensed by downgrades of struggling European nations and ratings inaccuracies in the run-up to the global downturn, has struck at the very foundation of the ratings agencies in an organized effort to undermine much of their influence on financial markets.
As predicted in a two-part story in NACM's Business Credit Magazine earlier this year (the July/August and September/October editions), the ratings agencies have fallen into the crosshairs of governments around the world and face almost certain changes, potentially sizable ones, to their business models. The strongest, most united hit against the credit ratings agencies (CRAs) came in an Oct. 27 manifesto from the Financial Stability Board (FSB), an offshoot of the G-20. FSB's "Principles for Reducing Reliance on CRA Ratings" calls for the rapid implementation of a series of standards designed to "reduce stability-threatening herding and cliff effects that currently arise from CRA rating thresholds:"
"The principles aim to catalyse a significant change in the existing practices, to end mechanistic reliance by market participants and establish strong internal credit risk assessment practices instead. The ‘hard wiring' of CRA ratings in standards and regulations contributes significantly to market reliance on ratings. This, in turn, is a cause of the ‘cliff effects' of the sort experienced during the recent crisis, through which CRA rating downgrades can amplify procyclicality and cause systemic disruptions. It can be also one cause of herding in market behaviour, if regulations effectively require or incentivize large numbers of market participants to act in similar fashion. But, more widely, official sector uses of ratings that encourage reliance on CRA ratings have reduced banks', institutional investors' and other market participants' own capacity for credit risk assessment in an undesirable way."
FSB suggested authorities and "standard setters" remove/replace references to CRA ratings in existing laws and regulations, when possible, in favor of alternative provisions as soon as prudently possible.
The effort is bold, definitive and grandiose, though not altogether unexpected. Economic officials in many nations have lashed out at the independent ratings agencies any time they have issued downgrades to nations' credit ratings in recent months. It has a generated a seemingly ongoing war of words in Europe, as the ratings agencies have been particularly hard on the high-debt "PIIGS" (Portugal, Italy, Ireland, Greece, Spain) in 2010. It is worth noting that five of the spots at the proverbial G-20 table are held by European nations of the European Union itself, all of which have publicly criticized the CRAs, and that does not include a pair of nations essentially considered part of the "Eurasian" block (Russia and Turkey).
Brian Shappell, NACM staff writer