Credit rating agencies caught in political web

Julian Harris
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NEXT Tuesday marks the three-year anniversary of Moody’s downgrading nearly 700 mortgage-backed bonds. As the subprime crisis ploughed on, the move followed thousands of other screeching U-turns on mortgage-backed assets by the three main credit rating agencies – S&P, Fitch and Moody’s. The trio’s cash cow had come back to bite, with a wave of politicians and economists queuing up to blame the agencies for inducing the devastating global financial crisis.

It is thus little wonder that many people now refuse to take the agencies seriously, even when they downgrade bonds from some of the world’s largest governments. Late on Friday S&P followed through on its threat to pull the US’s gold-plated triple A rating, downgrading to AA+.

Since the mid-1970’s government regulation, particularly in the US, has virtually institutionalised the three “Nationally Recognised Statistics Rating Organisations”, obliging corporations and investors to do business according to their ratings.

While privately-owned, the agencies’ existence is essentially government-backed, yet political leaders -- irritated by downgrades -- are now turning on them. Last week police authorities astonishingly raided the office of S&P and Moody’s in Italy, accusing the firms of causing “anomalous” movements in stock prices.

The situation is unhealthy for all concerned. We need a freer, more competitive market for agencies.