The credit rating agency Standard & Poor’s has recently lowered one step the U.S. top rating, in an unprecedented coup to the world’s largest economy that came after a political struggle that brought the country to the brink of default.
Some analysts consider that other areas of world economy, such as France or Britain would take fire from rating agencies because of economic and financial problems they face.
The consequence of rating drop for these countries could be devastating to the financial world, evidence is the bleeding on U.S. exchanges that followed the rating downgrade.
What are these rating agencies and how did they get such a great power? They are angels and demons. The biggest rating agencies are Standard & Poor’s, Moody’s and Fitch. When opinions are positive, governments praise them, but when the rating are negative, they are subject to collective hatred.
The rating agencies are private businesses that evaluate risks of government or corporate debt.
Q: Who is behind them?
A: Standard & Poor’s is a subsidiary trust of the American media and financial services provider McGraw-Hill, with shareholders including BlackRock (5.3%), the largest asset manager in the world, and Capital Group (12.3%), one of the largest global investment managers. Capital is also an important shareholder in Moody’s (16.4%), followed by Berkshire Hathaway’s investment vehicle of billionaire Warren Buffett (13%) and BlackRock (6.3%). Fitch is a subsidiary of French Fimalac, an investment services company.
Q: What actually do the rating agencies?
A: As banks assess the creditworthiness of a customer asking for credit, the rating agencies analyze the creditworthiness of companies, states and financial products.
Q: When were the rating agencies established?
A: They appeared in 1909 as a means to evaluate the bond issued of U.S. railway companies.
Q: Why rating agencies have such a great influence on the markets?
A: Because investors appreciate the security that a financial product, a company or a country offers depending of their rating. In country’s case, if the rating is closer to the maximum rating, the cost of financing (interest paid), that is required by investors is smaller. Agencies think for investors.
Q: Who pays the rating agencies?
A: These rating agencies were established to provide independent assessment to investors and the investors paid to have access to their analysis. In the ’70s, rating agencies companies began to demand rating fees from issuers of financial products. In 1975, fearing the increase in ‘bad’ credit rating agencies, the U.S. has designated S & P, Moody’s and Fitch as the only rating agencies that banks and brokers can use to get an assessment of their products.
Q: How much credit rating agencies earn?
A: They generate profits of over two billion dollars annually.
Q: Why are the rating agencies criticized?
A: Critics complain that rating agencies have lost the ability to independently assess the risks of certain investments, especially after they gave the maximum rating to products backed by mortgages that have attracted huge losses when the U.S. housing market fell, triggering the financial crisis. Critics noted that rating agencies are even paid by those evaluated, which questions the objectivity of analysis.
Q: What happens if the rating agencies are wrong?
A: They are punished and may issue only “opinions”.
Some financial experts accused S & P for the economic collapse in 2008, accusing the company for not downgrading the rating of mortgage backed securities, encouraging the growth of the housing bubble and causing the expansion of the economic crisis throughout the world.
Same charges face the other major credit rating agencies.