Scribd Logo
Upload

Welcome to Scribd!

  • Credit Rating Agencies Raman

    Uploaded by

    Vanessa Canoza
    26 views14 pages
    Did Rating Agencies Boost the Financial Crisis? Most observers, journalists from the yellow-press to trade journals, politicians and even economists feel absolutely confi dent that the rating agencies (henceforth RAs) bear a formidable responsibility for boosting the fi nancial problems of several peripheral European countries into liquidity and even solvency crises. The three big RAs are regarded as all-powerful, mysterious, ignorant, corrupt and unregulated. A specialised European rating agency is demanded, or at least some form of regulation and control of the incumbent agencies. The professional literature, however, is more differentiated, at least as to the rating of sovereign risks. The recent fi nancial crisis with the downgrading of Greece and, to a lesser extent, of Ireland, Portugal and Spain, affords an opportunity for a further test of the validity of these public charges. This paper starts with a review of the existing literature. It will then provide some information about the rating market and on the pattern of sovereign rating. This is followed by a case study of the RAs’ justifi cations for downgrading Greece; Greece has been selected as the problems culminated in this country, and Moody’s provides most of the material, as it is the only agency providing a full set of press releases with explanatory statements. The paper than investigates whether the results found for Greece are a special case or if they are typical for the other three countries as well. Finally, political aspects are discussed and conclusions drawn. Contrary to public opinion and more or less in accordance with the previous literature, the paper fi nds that the agencies’ sovereign ratings – the paper does not deal with ratings of securities or banks – follow the market rather than lead it, that their bias tends towards the optimistic side, and that they are clearly exposed to the characteristic forecasting errors: pro-cyclicality, turning-point mistakes, underestimation of changes and incapacity to deal with surprises (shocks). If they do have power, it is power delegated to them by policy and regulation. Rating Agencies’ Image and Existing Evidence The three big RAs, Standard and Poor’s, Moody’s and Fitch have a rather bad image. Their ratings are considered to be irresponsible, the main cause of the fi nancial crisis in Greece and, to a lesser extent, of the fi nancial problems in Ireland, Portugal and Spain. By downgrading they are said to have unjustifi ably blown up the countries’ existing problems, driven up market rates, prohibited the countries’ access to fi nancial markets and undermined the rescue operations of the IMF and the EU. A US Congress Inquiry Commission emphasised in spring that RAs (and investment banks) had played a major role in causing the world fi nancial crisis. O. Rehn, EU Commissioner responsible for economic and monetary affairs, demanded a basic reform of the rating sector in March 2011, and C. Juncker, head of the Eurogroup, expressed his “great surprise” as to the timing of the downgrading of Greece and Spain at about the same time. R. Brüderle, fl oor leader of the FDP in the German Bundestag, bemoaned that RAs by “self-confi dent raising or downing of the thumb can send whole countries into the abyss”. The German bank analyst F. Hellmeyer criticised the agencies’ “irresponsibility”: “They exacerbate the mood against the reform countries. They undermine the incontrovertible success of the reform steps. They ignore the success of the reform steps already achieved.”1 The Aus-rian economist S. Schulmeister argued more sarcastically in June 2011: “Having rescued Portugal, Europe’s elites heralded an end to the problem, Spain and Portugal were not threatened. As if in defi ance the RAs announced the potential downgrading of Spain and Italy a few days later.2 The Austrian newspaper “Die Presse” focused the publicly observed state of affairs in th

    Copyright

    © © All Rights Reserved

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    Did Rating Agencies Boost the Financial Crisis? Most observers, journalists from the yellow-press to trade journals, politicians and even economists feel absolutely confi dent that the rating agencies (henceforth RAs) bear a formidable responsibility for boosting the fi nancial problems of several peripheral European countries into liquidity and even solvency crises. The three big RAs are regarded as all-powerful, mysterious, ignorant, corrupt and unregulated. A specialised European rating agency is demanded, or at least some form of regulation and control of the incumbent agencies. The professional literature, however, is more differentiated, at least as to the rating of sovereign risks. The recent fi nancial crisis with the downgrading of Greece and, to a lesser extent, of Ireland, Portugal and Spain, affords an opportunity for a further test of the validity of these public charges. This paper starts with a review of the existing literature. It will then provide some information about the rating market and on the pattern of sovereign rating. This is followed by a case study of the RAs’ justifi cations for downgrading Greece; Greece has been selected as the problems culminated in this country, and Moody’s provides most of the material, as it is the only agency providing a full set of press releases with explanatory statements. The paper than investigates whether the results found for Greece are a special case or if they are typical for the other three countries as well. Finally, political aspects are discussed and conclusions drawn. Contrary to public opinion and more or less in accordance with the previous literature, the paper fi nds that the agencies’ sovereign ratings – the paper does not deal with ratings of securities or banks – follow the market rather than lead it, that their bias tends towards the optimistic side, and that they are clearly exposed to the characteristic forecasting errors: pro-cyclicality, turning-point mistakes, underestimation of changes and incapacity to deal with surprises (shocks). If they do have power, it is power delegated to them by policy and regulation. Rating Agencies’ Image and Existing Evidence The three big RAs, Standard and Poor’s, Moody’s and Fitch have a rather bad image. Their ratings are considered to be irresponsible, the main cause of the fi nancial crisis in Greece and, to a lesser extent, of the fi nancial problems in Ireland, Portugal and Spain. By downgrading they are said to have unjustifi ably blown up the countries’ existing problems, driven up market rates, prohibited the countries’ access to fi nancial markets and undermined the rescue operations of the IMF and the EU. A US Congress Inquiry Commission emphasised in spring that RAs (and investment banks) had played a major role in causing the world fi nancial crisis. O. Rehn, EU Commissioner responsible for economic and monetary affairs, demanded a basic reform of the rating sector in March 2011, and C. Juncker, head of the Eurogroup, expressed his “great surprise” as to the timing of the downgrading of Greece and Spain at about the same time. R. Brüderle, fl oor leader of the FDP in the German Bundestag, bemoaned that RAs by “self-confi dent raising or downing of the thumb can send whole countries into the abyss”. The German bank analyst F. Hellmeyer criticised the agencies’ “irresponsibility”: “They exacerbate the mood against the reform countries. They undermine the incontrovertible success of the reform steps. They ignore the success of the reform steps already achieved.”1 The Aus-rian economist S. Schulmeister argued more sarcastically in June 2011: “Having rescued Portugal, Europe’s elites heralded an end to the problem, Spain and Portugal were not threatened. As if in defi ance the RAs announced the potential downgrading of Spain and Italy a few days later.2 The Austrian newspaper “Die Presse” focused the publicly observed state of affairs in th

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    26 views14 pages

    Credit Rating Agencies Raman

    Uploaded by

    Vanessa Canoza
    Did Rating Agencies Boost the Financial Crisis? Most observers, journalists from the yellow-press to trade journals, politicians and even economists feel absolutely confi dent that the rating agencies (henceforth RAs) bear a formidable responsibility for boosting the fi nancial problems of several peripheral European countries into liquidity and even solvency crises. The three big RAs are regarded as all-powerful, mysterious, ignorant, corrupt and unregulated. A specialised European rating agency is demanded, or at least some form of regulation and control of the incumbent agencies. The professional literature, however, is more differentiated, at least as to the rating of sovereign risks. The recent fi nancial crisis with the downgrading of Greece and, to a lesser extent, of Ireland, Portugal and Spain, affords an opportunity for a further test of the validity of these public charges. This paper starts with a review of the existing literature. It will then provide some information about the rating market and on the pattern of sovereign rating. This is followed by a case study of the RAs’ justifi cations for downgrading Greece; Greece has been selected as the problems culminated in this country, and Moody’s provides most of the material, as it is the only agency providing a full set of press releases with explanatory statements. The paper than investigates whether the results found for Greece are a special case or if they are typical for the other three countries as well. Finally, political aspects are discussed and conclusions drawn. Contrary to public opinion and more or less in accordance with the previous literature, the paper fi nds that the agencies’ sovereign ratings – the paper does not deal with ratings of securities or banks – follow the market rather than lead it, that their bias tends towards the optimistic side, and that they are clearly exposed to the characteristic forecasting errors: pro-cyclicality, turning-point mistakes, underestimation of changes and incapacity to deal with surprises (shocks). If they do have power, it is power delegated to them by policy and regulation. Rating Agencies’ Image and Existing Evidence The three big RAs, Standard and Poor’s, Moody’s and Fitch have a rather bad image. Their ratings are considered to be irresponsible, the main cause of the fi nancial crisis in Greece and, to a lesser extent, of the fi nancial problems in Ireland, Portugal and Spain. By downgrading they are said to have unjustifi ably blown up the countries’ existing problems, driven up market rates, prohibited the countries’ access to fi nancial markets and undermined the rescue operations of the IMF and the EU. A US Congress Inquiry Commission emphasised in spring that RAs (and investment banks) had played a major role in causing the world fi nancial crisis. O. Rehn, EU Commissioner responsible for economic and monetary affairs, demanded a basic reform of the rating sector in March 2011, and C. Juncker, head of the Eurogroup, expressed his “great surprise” as to the timing of the downgrading of Greece and Spain at about the same time. R. Brüderle, fl oor leader of the FDP in the German Bundestag, bemoaned that RAs by “self-confi dent raising or downing of the thumb can send whole countries into the abyss”. The German bank analyst F. Hellmeyer criticised the agencies’ “irresponsibility”: “They exacerbate the mood against the reform countries. They undermine the incontrovertible success of the reform steps. They ignore the success of the reform steps already achieved.”1 The Aus-rian economist S. Schulmeister argued more sarcastically in June 2011: “Having rescued Portugal, Europe’s elites heralded an end to the problem, Spain and Portugal were not threatened. As if in defi ance the RAs announced the potential downgrading of Spain and Italy a few days later.2 The Austrian newspaper “Die Presse” focused the publicly observed state of affairs in th

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 14

    The Role of Credit Rating

    Agencies in Developing
    Caribbean Corporate and
    Government Bond Markets
    Caribbean Connect: High Level Symposium on CSME
    Barbados: June 28-30, 2006
    S.Venkat Raman
    CEO & Chief Rating Officer
    Caribbean Information & Credit Rating Services Limited

    Presentation structure

    Key elements of bond market


    development
    The role of rating agencies
    CariCRIS: A rating agency for
    the Caribbean
    CariCRIS & CSME
    2

    What is a credit
    rating ?
    What a rating is:

    A current opinion on the relative creditworthiness of


    debt
    An debt specific evaluation
    Aimed at differentiating credit quality
    A response to the markets demand for information

    What a rating is not:

    Not an audit of the issuing company


    Not a one time assessment of creditworthiness of the issuer
    Not a general purpose certification of goodness of a
    company
    Not a recommendation to buy, hold or sell the rated security

    Key elements of bond market


    development
    Issuer diversity
    Investor diversity
    Transparency and disclosure
    Accounting standards to give true financial picture
    Corporate governance for predictability of corporate
    action
    Credit ratings to provide a comparative framework

    Independent regulator
    Market infrastructure brokers, exchanges,
    settlement systems etc.
    4

    Role Of Rating Agencies In


    Debt Market Development
    At The Core
    Creation of market for corporate credit and pricing of credit
    risk
    Readily usable risk indicator
    Tool for price-discovery, particularly for non-sovereign debt
    Creating of a proper yield curve
    Key information intermediary between issuers and investors
    Reduce information asymmetry between investors and issuers
    Facilitate comparison of investment options
    Facilitate pricing of credit risk
    Creation of secondary market in debt
    Creates liquidity in bond portfolios
    Leads to clarity in pricing of credit risk
    Makes structured debt issuances easier
    Building of financial awareness
    Best practices for company analysis, risk assessment

    Role Of Rating Agencies


    - At The System Level
    Widen access to funding for smaller
    businesses
    Compliments regulatory oversight
    Prioritises regulators concern areas
    Prudential practises predicated on ratings

    Effective self-corrective tool for


    managements & businesses
    Enhances trust and market confidence
    =>Expands savings pool
    6

    Role Of Rating Agencies


    - At The Application
    Level
    Estimation of credit risk
    Unbiased opinion arrived at through structured process
    Publicly available information
    Single, easily comprehensible grade

    Basis for scientific risk management in banking


    sector

    Better lending decisions, less NPAs going forward


    Fundamental benchmarking for IRB (Basel) approaches
    Better pricing of credit risk
    Improved loan portfolios lend strength to the banking
    system

    Basis for securitisation


    Unlocking liquidity in loan and asset portfolios

    Rating agencies:
    Role Vs Obligations
    Independence : Real & perceived
    Ownership
    Governance architecture
    Financial independence
    Conformance to recognized codes of conduct

    Transparency
    Integrity in analytics & operations
    Investment in market education &
    development
    8

    The Caribbean Perspective

    The need for ratings


    in the Caribbean
    Need for a vibrant bond market
    Efficient financial intermediation and credit allocation
    Alternate funding source to banks
    Financial System Stability
    Liquidity & financial crises management

    Caribbean

    Small sized economies limiting local bond market development


    Businesses with appetite for funds and vice-versa
    Credit research in public domain relatively scare
    Sizeable regional economy
    Increasing evidence of cross border financing

    The Caribbean needs an integrated, regional debt


    market
    A regional credit rating agency is a critical
    ingredient

    10

    CariCRIS
    First Caribbean rating agency and worlds first
    regional credit rating agency
    Launched in 2004/2005
    Fruition of an idea long espoused by CARICOM
    Promoted by regional Central Banks, CDB, IDB
    and other pan-regional institutions
    Shareholding by CRISIL Ltd., the 4th largest
    rating agency in the world and a subsidiary of
    S&P.
    Currently ratings being conducted in
    Barbados, Jamaica, OECS & T&T.
    11

    CSME and role of


    CariCRIS
    Key Themes of CSME

    Integration of Financial Markets


    Seamless cross-border financial flows

    CariCRIS role & benefits

    Strengthen markets and facilitate unified regulation

    Strong impetus to capital market development;


    Energise the CSME initiative to create a unified debt markets
    Strengthen financial systems through diversified markets
    Investor Protection & better Market Discipline

    Facilitating regional penetration of companies Increases


    transparency
    Enhance credibility & independent profiling/risk analysis
    Increased access to funding sources

    Facilitating cross-border investment/lending

    Enhanced ability to compare credits across the region


    Reduces information risk and facilitates informed decisions

    12

    The Road Ahead


    The Beginning : has been WELL DONE
    Rating Agency : needs to stick with
    its values and mission
    Policy Makers & Regulators: Need to
    act further to consciously build
    ratings into financial architecture
    Investors & Issuers : The leaders
    need to show the way
    13

    THANK YOU
    Caribbean Information & Credit
    Rating Services Limited
    info@caricris.com / www.caricris.com
    Tel: (868) 627-8879
    Fax: (868) 625-8871

    You might also like