Rating agencies

[gregkawere]

What is the role of rating agencies? Who regulates rating agencies? Are rating agencies necessary in the global economy? The USA has one of the worlds biggest deficits but it is never given junk status whilst countries in Africa are given a ratings downgrade for small infractions. The same rating agencies did not spot the problems with the housing market in the US that led to the global downturn but they are given a blank cheque to do as they please still. Is there an alternative system of rating countries or companies other than the rating agencies.

 

[Jehosefat]

I'll answer your questions in order:

• They provide a relative ranking of the credit worthiness of obligors
• No one regulates them however if their rating were consistently wrong, no one would use that rating agency and it would go out of business
• Yes, they are very necessary to give investors a benchmark for the amount of risk they are taking when they enter into a transaction so they can weigh up whether they are receiving a high enough return
• The US might have one of the biggest deficits but it also has the largest economy and all of its obligations are payable in US Dollars so it could print as many as it needed to pay back all its creditors if it could not raise enough income to do so. Smaller countries, with obligations not denominated in their own currency, do not have this option. Also don't make it a West vs. Africa thing. A lot of countries in Europe have also been downgraded.
• No blank cheque, also almost no one spotted the financial crisis so you can't just s**t on the rating agencies for that. Additionally investors are still required to do their own due diligence before buying something and they didn't spot it either.
• No, not really. Most Banks have their own internal model to rate borrowers but the ones for Banks, Sovereigns etc. are very similar to the ones the rating agencies use.

 

[Johnatan56]

I'll answer your questions in order:

• They provide a relative ranking of the credit worthiness of obligors
• No one regulates them however if their rating were consistently wrong, no one would use that rating agency and it would go out of business
• Yes, they are very necessary to give investors a benchmark for the amount of risk they are taking when they enter into a transaction so they can weigh up whether they are receiving a high enough return
• The US might have one of the biggest deficits but it also has the largest economy and all of its obligations are payable in US Dollars so it could print as many as it needed to pay back all its creditors if it could not raise enough income to do so. Smaller countries, with obligations not denominated in their own currency, do not have this option. Also don't make it a West vs. Africa thing. A lot of countries in Europe have also been downgraded.
• No blank cheque, also almost no one spotted the financial crisis so you can't just s**t on the rating agencies for that. Additionally investors are still required to do their own due diligence before buying something and they didn't spot it either.
• No, not really. Most Banks have their own internal model to rate borrowers but the ones for Banks, Sovereigns etc. are very similar to the ones the rating agencies use.

nice reply.

 

[gregkawere]

thanks for the comprehensive reply