Debt crisis loosens top agencies' grip over credit ratings

10:48, June 02, 2010      

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After Europe's sovereign debt crisis, Moody's, Standard & Poor's and Fitch Ratings, the top three global financial rating agencies have been criticized and utterly isolated. People now realize that it is extremely urgent to establish working rules in the credit-rating industry.

Financial markets have become more and more complicated over the last century. As an important institutional arrangement, credit ratings were widely used in capital markets, bank credit and trade. Due to the fact that systematic risk was not included in the rating model, credit ratings from top three global rating agencies were shown to have many defects in the U.S. subprime lending crisis and Greece's debt crisis. It showed that rating standards need to be improved as soon as possible.

With the development of modern credit transactions, credit has become a new and individual fictitious form of capital. Credit capital is not only related to financing capability, but also concerns good faith, social credibility and the value orientation of credit. Credit ratings should predict the risk of credit capital. If credit ratings could not be independent of the real economy, then rating results would rely heavily on the real economy, and the drama of a rapid downgrade from "AAA" to "CCC" would happen.

The credit of the sovereign debt of Spain, Greece and Portugal had been downgraded recently, however, how much could the credit of these countries really change in such a short time? This kind of credit rating was not believable, and the market did not need this kind of valueless intermediary service.

In theory, the credit rating service should be an intermediary service led by the market disciplines, not the government. If the credit rating agencies are business entities that only aim to make profit, they should develop in accordance with the market disciplines and enjoy free competition. The agencies should also be managed by corporate governance principles. The shareholders should not have conflicts of interest with the traders and they should not be related to the rating activities or those being rated.
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