Time for a ratings shake-up

Agencies consider their ratings just opinions but they are undoubtedly powerful opinions

By Michelle Perry | Published 09:46, 21 October 11

RatingsI was heartened to see the news today that Brussels is considering sweeping changes to the regulation of credit ratings. It a move that’s long overdue and an issue I raised in 2005 as associate editor of a weekly magazine I used to work on.

Of course it seems a shame that the main and most contentious proposal by European regulators would be to suspend credit ratings of countries undergoing bail-outs, according to a draft of the proposals seen by the Financial Times.

This is slightly disingenuous of the EU to overhaul the system when the eurozone is currently in the throes of a stalemate over country bail-outs and how to rescue major banks.

Nonetheless an overhaul or at the very least a thorough investigation of how these agencies function, who they’re accountable to and if their methodology is transparent is timely.

My point back in 2005 was however founded on the credibility and independence of ratings agencies.

Six years ago the credibility of their research was attacked when they have failed to spot companies on the verge of an implosion. Enron, Worldcom, Parmalat and Refco were all issued with investment grade ratings weeks before the accounting scandals embroiling them broke.

In 2003 Standard & Poor’s credit analyst Hugues de La Presle put Parmalat’s bonds on a watch list for a downgrade. It was weeks before the revelation that there was a $10 billion (£5.7 million) black hole in its accounts.

When de La Presle was asked why he had kept Parmalat’s investment-grade rating, he said: “When the [chief financial officer] of a major company says the cash is there and it’s freely available, it’s a very strong statement.”

It is this very fact that ratings agencies base their valuations on data supplied by company insiders, which by its nature cannot be independent or objective, that is troubling.

Agencies consider their ratings as just opinions but they are undoubtedly powerful opinions; that in these times can make or break a country or institution. With this power should come adequate responsibility and transparent accountability.

I look forward to hearing more details about the proposals.

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