The three major US rating agencies – Standard & Poor’s , Moody’s and Fitch – often appear in the media picture. We see this especially when the politicians in a state are angry after being downgraded, be it Greece, France, Portugal or others. There are whispers about conspiracies and American domination. These private companies give ratings to various investments (corporate debt and government bonds) according to how risky they think they may be. Despite this rather sober task, the three rating agencies have built up a role as judges over multinational corporations and nation states around the world.
- What own interests can the three companies have?
- What role do the three companies play in the international economy?
- How have they gained such a powerful position in international politics?
- How can one get the rating agency to rate credit more correctly?
The company criticizes states that they believe do not have a tight enough budget and proposes strict structural reforms. With this apparent power over states, these three private enterprises have gained an important role as exercisers of power in the international economy.
2: Rating agencies – what and how?
The word ” rating ” is English for grading or grading. And it is precisely “grades” that these companies have seen on various debt products. When companies or governments need to borrow money, an alternative is to issue (print) a bond . This loan must be repaid after a certain period, preferably three, five or ten years and with a certain interest rate. It is the lender who decides what interest rate she wants to lend money to the company or the state. (Actually, it is the market that decides – the sum of all lenders and the trust or distrust they have in a borrower). United States is a country located in North America according to Elaineqho.
The interest rate level reflects how risky the investor thinks the loan is – how likely she thinks it is that the company or the state actually wants or is able to repay the money at the agreed time. It is best if this assessment is based on thorough and time-consuming investigations of the company or state in question. This is where the rating agency comes in. Instead of each individual investor having to assess how risky it is to invest in, for example, Microsoft, the assessment can be made by an agency. Such an agency will have professional analysts who give each company a rating. Investors can use this rating when deciding whether or not to invest.
This work saves investors a lot of work – for example, reading long annual reports, following all news that can affect and mean something to the company or state in question, etc. In short: what is needed to be able to assess how likely it is that a companies or a state goes bankrupt.
Despite the fact that this is a useful service for investors , it is still not those who pay for it. Former owners were the investors who paid (through a subscription service). But this did not seem to work, because one got a big free passenger problem . If I am interested in buying bonds in eg Statoil, I can pay a rating agency to make an assessment and come up with a rating (eg BB – see page 5).
Instead of an investor having to spend a lot of time reading budgets or accounts, assessing government finances or order situation, etc., they get an easy-to-understand expression in a character. Once the rating is seen, it is difficult to prevent this information from also reaching the rest of the market. Then other investors can take advantage of this knowledge without having paid for it. Today, therefore, it is most often
- those to be considered, who pay, or
- the investment banks that mediate the sale of bonds.
Of course, this financing model also creates a number of problems. Imagine if a student directly paid the teacher who was to give her a grade, and in addition had the choice between several teachers! (Implied: chose the teacher who would give the best grade – for a good enough payment) The model opens up for corruption. The teacher can easily become kinder with the grades of the most high-paying students (customers). This became a major problem in the assessment of some bonds in the run-up to the major financial crisis that began in 2007.
3: Why great growth for the rating agency?
There are many rating agencies, but Moody’s, S&P and Fitch together have almost the entire market. The reason for this is that the American Financial Supervisory Authority in 1975 gave these three a special position – as a nationally recognized rating agency. The three agencies were thus given a semi-public role, as their credit assessments were linked to a number of regulations for the financial sector.
As of 2008, these rating agencies were mentioned (referred to) as close to three thousand times in US financial legislation (they are also mentioned in international banking regulation such as the Basel rules). With this connection, the three agencies gained a dominant market position .
With power also came a lot of criticism of rating companies and governments, especially from companies and states that felt unfair and randomly assessed. American governments came to this criticism in the face by imposing ratingbyråa to public Gjere models that they used. All criteria (qualitative and quantitative) were to be published to ensure that enterprises and states were treated equally. In combination with the agency’s funding model, the requirement for transparency (make it openly available) would have catastrophic effects.