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Do credit rating agencies have credibility?

By Luo Sha (China Youth Daily)

14:47, October 11, 2011

Edited and Translated by People's Daily Online

The U.S. Securities and Exchange Commission recently decided to initiate legal proceedings against Standard and Poor's for violating securities laws and wrongly rating mortgage loan companies. Regulators believe that rating agencies are partly to blame for the ever-escalating housing default rate in the United States in recent years.

When they heard the official explanation, media expressed suspicions and said that this accusation is just the U.S. government’s way of punishing Standard and Poor's for its disobedience. In fact, the case should go back to August 2011, when Standard and Poor's downgraded the debt rating of the Untied States, but the other two of the three major rating agencies did not follow suit. That incident is regarded as the initial cause of this accusation.

It has become possible that if a rating agency does not listen to the U.S. government, it will be punished. Therefore, the independence of rating agencies is being questioned once again.

The three major rating agencies have faced many credibility crises in recent years. Not long ago, Fitch was criticized for frequently downgrading the credit ratings of many countries and regions. It downgraded the sovereign credit ratings of several European countries, and the agency said it might even downgrade the credit rating of China within two years.

It is not hard to understand that a single rating could lead to “big operations” by various countries.

In a capital market that relies heavily on the creditability, the credit rating can directly decide the capital power of an organization or country. As the financial market continues to develop rapidly, the investors are eager to learn about the true situations of the debtors so that they could optimize their investment options based on them to realize the investment safety and obtain more stable returns. Essentially, the sovereign credit rating is a kind of judgment made by a rating agency on a national government's credit wish and creditability of paying its debt as a debtor.

In this sense, credit rating as a quantitative evaluation standard can not only provide investors with fair and objective information, but they can also be used by executives to check out and make decisions. Furthermore, credit ratings can prove that bond issuers are strong enough to pay back the debt, enabling them to raise funds at low costs.

Investors will be exposed to greater risks when buying bonds issued by countries with low credit ratings. This means that lower credit ratings will likely cause debtors to face financing difficulties. Financing difficulties will worsen their financial conditions and in turn further lower their credit ratings.

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Leave your comment2 comments

  1. Name

wende at 2011-10-1171.125.81.*
Just like the media in the US which did not cover much demonstrations, credit rating companies are more slant over US financial performance and would not be the first to criticize or downgrade US credit ratings. Is that fairness?
erwan at 2011-10-11195.250.46.*
I don"t believe either that the big 3 rating agencies still have credibility. And I think that a serious alternative is needed, with more transparency and neutrality.

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