Credit rating agencies: United Troika of the dictatorship of the triple “A” – Interia

– People earning seven-figure sum per year, extort from fools earning five-digit amount of the highest possible rating for the worst loans – so a decade ago evaluated the work of one of the CRA employee of a large investment bank …

– Guys, where failed to catch on Wall Street are going to Moody’s – the words quoted in Michael Lewis’s best-selling book “the Big Short”. Prominent work was an attempt to describe the reasons for the collapse of the US mortgage market, topped with a historic collapse (in 2008) of the bank Lehman Brothers.

“Big Three” credit rating agencies (S & amp; P, Fitch and Moody’s mentioned) just since 2008, was the target of a particularly fierce attacks. At that time, the world spread over the financial crisis, and sometimes misguided assessment of the creditworthiness of companies and countries were the perfect breeding ground for criticism of the authors rankings.

However, credit rating agencies – even though they have a lot of behind the ears – still shake the financial world. This Friday (May 13) said Moody’s will issue another verdict on Polish. Whether we like it or not, investors buying Treasury securities from the Polish government will take the rating into account.

We look forward to further cut the rating of Polish

Once Upon a Time in America

the first credit rating agencies were created over 100 years ago in the USA. There were a natural complement wildly growing market various financial instruments (first called the ratings drawn up for railway bonds).

The ratings were so nothing but the market response to the needs of investors, who expected the analysis and display dot. Purchases of securities.

After many years, hundreds of smaller and larger agencies emerged to lead S & amp; P, Fitch and Moody’s. “Big Three” carved out approx. 90 per cent. the rating of the pie, leaving the rest of competition.

Over time, the rules of some investment funds emerged provisions forcing managers capital to you in decisions about purchasing securities guided just published ratings.

Pros and cons

the evaluation (ratings) publicized by the media and determining the market to be or not to be, we used to look at the Europeans – we consider them to be unquestionable verdict supported by the authority of any state institution. However, these agencies – quite “the American way” – are private companies, the issuers of securities pay a fortune for issuing ratings. You ask why? The answer is simple – without those hated and criticized ratings dog with a lame leg does not interest the issued securities. Several years ago, one of the major Polish cities decided to sell (issue) bonds to the acquired with the money to finance important investments. It did it with good effect after the order assessing the creditworthiness of the city one of the rating agencies. Unrated serious investors will not buy bonds.

Investors usually do not have much time to make decisions. Credit rating agencies have developed over the years, so a simple three-letter ratings system supplemented with pros and cons. Reported in the media the next views the debt crisis led to that today, children in secondary schools know that we live under the dictatorship of the triple “A”.

Standard & amp; Poor’s started in the nineteenth century. After the publication of financial statistics. Moody’s Investors Service was established in 1900. As John Moody Company – is now part of Moody’s Corporation. Fitch Ratings was founded in 1913. (Now Fitch Group).

Each agency has its own rating system. Rating is expressed in the letters, supplemented signs (+) and (-) or digits.

For example, all three agencies the highest investment rating (extremely large issuer’s ability to meet its obligations) define the three letters “A” (AAA or Aaa). The two letters “A” (AA, Aa – in the case of S & amp; P and Fitch are sometimes supplemented by plus or minus) represent a large issuer’s ability to meet its obligations). One letter “A” is a high capacity to repay obligations while sensitivity to adverse environment).

Three letters “B” (BBB or BBB) represent still preserved sufficient issuer’s ability to repay obligations, but the two letters ” B “, and even worse one letter” B “is already a cause for concern (the issuer can still pay its obligations, but are possible disruptions in debt servicing).

Rating at” C “(from CCC to C) are already compromised ability to repay debts.

About the rating of “D” is better not to remember – means the loss of ability to pay obligations.

The big bummer

The argument against agencies are frequent errors in assessments. It started with the collapse of Enron, the rating for a few more days before the bankruptcy was assessed by the agencies at the level of investment A.

Later agencies staged high marks incomprehensible to the average citizen of derivative instruments based on US mortgages. The subprime crisis has come as a tsunami – almost from day to day, it turned out that this “financial engineering” is worth very little, as issued this assessment instruments.

• in the case of developed economies, political developments in the context of their impact on the market are just part of a larger puzzle, in which the primary role played by economic fundamentals. According to analysts still gathering black clouds over the Polish assets. more »

Even just for the recall of the highest assessments issued by the agency bank Lehman Brothers – just before his fall.

Finally, Europe – at the beginning of December 2009. “Big Three” exhibited Greek bonds rating suggesting full credibility! At the same time, they all knew that the Greek debt threatens to bankrupt the country …

Do not believe politicians

When the debt crisis in many EU countries crawled out of the offices of ministers finance, politicians began to undermine the credibility of the rating agencies lower the assessment of individual countries.

– How is it that the fate of Europe to decide the three US private company – asked a few years ago, one of the representatives of the European Commission. Other defenders of wasteful policies of the EU even proposed the establishment of their own (probably controlled from Brussels) credit rating agency which would replace the hated S & amp; P, Fitch and Moody’s. Fortunately, what trzeźwiejsi EU politicians explained the “revolutionaries”, as investors react to such control ratings. It is worth remembering, waiting for Friday’s verdict Moody’s.