Bad Rating for Rating Agencies; City Comment

The Evening Standard (London, England), November 11, 2003 | Go to article overview
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Bad Rating for Rating Agencies; City Comment


WHEN debt rating agency Moody's raised the credit rating of Russia to investment grade, the price of that country's bonds soared.

Unfortunately, most of the gain was in the half-hour or so before Moody's made the announcement.

Now Bloomberg reports that the Russian Federal Securities Commission plans to ask the Securities and Exchange Commission in Washington and the Financial services Association in London what they think was going on - as if it didn't know.

How interesting, though, that Moody's change of rating moved the market as much as it did. It underlines the huge power that now rests with these bodies. What other organisation outside government could move Russia's benchmark 3.4% Eurobond in a single trading session? Putin does not manage that much of a swing when he arrests oligarchs.

If governments quake, so does everyone else. For example, in current conditions the agencies effectively have the power of life and death over insurance companies.

Even Munich Re, one of the biggest names in global insurance, lost its battle with Standard & Poor's and was effectively forced into a massive rights issue to avoid a debt downgrade.

In non-financial sectors, a company's plans to do a deal or undertake a restructuring are made or broken by what the debt agencies think. A disposal or an acquisition may make perfect operational sense.

But if the agencies indicate they will downgrade the debt as a result, management will not do the deal.

It cannot be because what the rating agency thinks will affect what bank-loan officers think and whether bond investors can or cannot buy their securities. A bad rating call - justified or not - can destroy a company's ability to raise cash and therefore to function. The time has come to ask whether ratings agencies have too much power and insufficient accountability.

They do not always employ the sharpest tools in the box, their processes are not transparent and they are not always accurate in all their calls. Starting with a clean piece of paper, it is unlikely that anyone would invent what we have today. We ought to think hard about whether it is really what we want for tomorrow.

Bank riddle

GIVEN that our interest rates went up last week, it is interesting how US Federal Reserve chief Alan Greenspan can look on a huge jump in employment and an astonishing 7% rate of growth and conclude that there is no case for lifting interest rates from their current low of 1%.

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