Credit Rating Agencies

rating agencies

This article takes a closer look at rating agencies and how they influence the capital market. University of Sydney's Susan Schroeder recently published a monograph entitled Public Credit Rating Agencies: Which is a rating agent? As Standard & Poor's - or S&P, as it is sometimes called - reduced its rating of Greece's sovereign debts, the rating agencies saw a strong decline in the country's sovereign bond market. Technically, it reduced its rating from BBB to BB+, a rating known to savers as "speculative note" or "junk".

What is included in a rating? Rating agencies give credit assessments to sovereigns and finance firms that are issuing debts. You also evaluate finance instruments. Credit assessments relate to the probability of a "default" - or the probability that the state, entity or production facility will fail to comply with its statutory obligation (e.g. to make planned payments).

Our highest rating is a triple-A (AAA or Aaa), while everything is below BBB- (also known as Baa3) below invest Grade or junk-grade. Moody's, S&P and Fitch are the major rating agencies. It is estimated that there are up to 72 rating agencies. The rating agencies are arguing that credit rating makes a market more effective.

You say they reduce the cost of credit for solid financial institution by giving investor evidence of the potential credit loss between different jurisdictions, businesses and commodities. Enterprises with a "junk" rating are likely to find it more difficult to lend cash and earn higher interest when taking out a credit.

Which rating agencies evaluate the rating agencies? Rating agencies have come under fire for their services in recent crisis situations. Following the Enron collapse in 2001, they were held responsible for being too sluggish to lower their credit rating. In addition, detractors allegedly say that a clash of interest has arisen because some rating agencies are remunerated by the companies they evaluate.

Specifically, the rating agencies were denounced for giving triple-A credit assessments for regulated finance instruments (e.g. on the basis of mortgages ), which ultimately failed and contributed to the 2008 deep economic downturn. Even though credit rating agencies do not evaluate individual persons, their acts may adversely impact the household's ability to hold assets. For example, a worse rating can cause a decline in the equity value of a business or postpone an index.

In the case of individual Member States, a downgrading of a country's public indebtedness may lead to higher interest rate levels for government borrowings. Teaching for states, companies and individual persons is not to incur more debts than can be paid back under good terms - or when things unexpectedly turn around.

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