Università degli studi di torino |
Rating agencies and financial speculation |
An analysis of the protagonists of the world market |
Elisa Valenti |
Matricola 711323 |
The protagonists of the world market | 2 |
A particular source of power: rating agencies and country rating | 2 |
Conflict of interest? | 4 |
Other issues of concern * Barriers to entry and lack of competition * Transparency | 555 |
The importance of reputation | 6 |
What went wrong? | 7 |
The need for regulation | 7 |
Can we trust the rating agencies? * The Enron Case Study * The Parmalat Case Study | 889 |
Are rating agencies guilty? | 12 |
The sinister power of ...view middle of the document...
Soon a new problem emerged, that is the conflict of interests. To respond to how many worried about the reliability of rating agencies, organizations in charge of monitoring were instituted: the NRSROs (Nationally recognized statistical rating organizations). To become a NRSRO, a rating organization had to fulfill some requirements difficult to achieve. But regulations had also a side effect: not many agencies were able to fulfill the requirements and the number of rating agencies decreased consistently, creating a market very little competitive.
A particular source of power: rating agencies and country rating
Regarding their role vis-à-vis developing countries, the rating of country and sovereign is particularly important. As defined by Nagy "Country risk is the exposure to a loss in cross-border lending, caused by events in a particular country which are – at least to some extent – under the control of the government but definitely not under the control of a private enterprise or individual". Under this definition, all forms of cross-border lending in a country – whether to the government, a bank, a private enterprise or an individual – are included. Country risk is therefore a broader concept than sovereign risk. The latter is restricted to the risk of lending to the government of a sovereign nation. However, sovereign and country risks are highly correlated as the government is the major factor affecting both. Rare exceptions to the principle of the sovereign ceiling – that the debt rating of a company or bank based in a country cannot exceed the country’s sovereign rating – do occur.
The failure of big CRAs to predict the 1997–1998 Asian crisis and the recent bankruptcies of Enron, WorldCom and Parmalat has raised questions concerning the rating process and the accountability of CRAs and has prompted legislators to scrutinize rating agencies.
Rating explained | | |
Interpretation | Moody | Standard & Poor’s | Fitch |
| Long term | Short term | Long term | Short term | Long term | Short term |
Investment-grade ratings | | | | | | |
Highest credit quality | Aaa | | AAA | | AAA | |
High credit quality | Aa1Aa2Aa3 | Prime-1 | AA+AAAA- | A1+ | AA+AAAA | F1 |
Strong payment capacity | A1A2A3 | Prime-2 | A+AA | A1 | A+AA | |
Adequatepayment capacityLast rating in investment-grade | Baa1Baa2Baa3 | Prime-3 | BBB+BBBBBB | A2A3 | BBB+BBBBBB | F2F3 |
Speculative-grade ratings | | | | | | |
SpeculativeCredit risk developing,due to economic changes | Ba1Ba2Ba3 | | BB+BBBB- | B | BB+BBBB- | B |
Highly speculative,credit risk present,with limited margin safety | B1B2B3 | Not prime | B+BB- | | B+BB- | |
Highdefault risk,capacity depending on sustained,favourable conditions | Caa1Caa2Caa3 | | CCC+CCCCCC-CC | C | CC+CCCCCC-CC | C |
Default,Although prospect of partial recover | Ca, C | | C, D | D | C, D | D |
Source: Based on Moody's, Standard and Poor's and Fitch.
Conflict of interest?