Credit Rating Agencies Raman

Did Rating Agencies Boost the Financial Crisis?Most observers, journalists from the yellow-press to tradejournals, politicians and even economists feel absolutelyconfi dent that the rating agencies (henceforth RAs) beara formidable responsibility for boosting the fi nancial problemsof several peripheral European countries into liquidityand even solvency crises. The three big RAs are regardedas all-powerful, mysterious, ignorant, corrupt and unregulated.A specialised European rating agency is demanded,or at least some form of regulation and control of the incumbentagencies. The professional literature, however, is moredifferentiated, at least as to the rating of sovereign risks.The recent fi nancial crisis with the downgrading of Greeceand, to a lesser extent, of Ireland, Portugal and Spain, affordsan opportunity for a further test of the validity of thesepublic charges.This paper starts with a review of the existing literature. It willthen provide some information about the rating market andon the pattern of sovereign rating. This is followed by a casestudy of the RAs’ justifi cations for downgrading Greece;Greece has been selected as the problems culminated inthis country, and Moody’s provides most of the material, asit is the only agency providing a full set of press releaseswith explanatory statements. The paper than investigateswhether the results found for Greece are a special case or ifthey are typical for the other three countries as well. Finally,political aspects are discussed and conclusions drawn.Contrary to public opinion and more or less in accordancewith the previous literature, the paper fi nds that the agencies’sovereign ratings – the paper does not deal with ratingsof securities or banks – follow the market rather thanlead it, that their bias tends towards the optimistic side, andthat they are clearly exposed to the characteristic forecastingerrors: pro-cyclicality, turning-point mistakes, underestimationof changes and incapacity to deal with surprises(shocks). If they do have power, it is power delegated tothem by policy and regulation.Rating Agencies’ Image and Existing EvidenceThe three big RAs, Standard and Poor’s, Moody’s and Fitchhave a rather bad image. Their ratings are considered tobe irresponsible, the main cause of the fi nancial crisis inGreece and, to a lesser extent, of the fi nancial problemsin Ireland, Portugal and Spain. By downgrading they aresaid to have unjustifi ably blown up the countries’ existingproblems, driven up market rates, prohibited the countries’access to fi nancial markets and undermined the rescueoperations of the IMF and the EU. A US Congress InquiryCommission emphasised in spring that RAs (and investmentbanks) had played a major role in causing the worldfi nancial crisis. O. Rehn, EU Commissioner responsible foreconomic and monetary affairs, demanded a basic reformof the rating sector in March 2011, and C. Juncker, headof the Eurogroup, expressed his “great surprise” as to thetiming of the downgrading of Greece and Spain at aboutthe same time. R. Brüderle, fl oor leader of the FDP in theGerman Bundestag, bemoaned that RAs by “self-confi dentraising or downing of the thumb can send whole countriesinto the abyss”. The German bank analyst F. Hellmeyer criticisedthe agencies’ “irresponsibility”: “They exacerbate themood against the reform countries. They undermine the incontrovertiblesuccess of the reform steps. They ignore thesuccess of the reform steps already achieved.”1 The Aus-rian economist S. Schulmeister argued more sarcasticallyin June 2011: “Having rescued Portugal, Europe’s elites heraldedan end to the problem, Spain and Portugal were notthreatened. As if in defi ance the RAs announced the potentialdowngrading of Spain and Italy a few days later.2 TheAustrian newspaper “Die Presse” focused the publicly observedstate of affairs in th