Power of Credit Rating Agencies Questioned

While EU authorities appear to be committed to creating a European credit rating firm, there are doubts that this will appease investors, who may view a government created credit rater, undertaking the task of rating the governments that created it, as less than credible. Credit rating agencies face much criticism because they have to take the tough decisions, aware that those decisions will impact on the company or country they are rating, and possibly even on world-wide markets. US credit rating agencies have taken a lot of flack for being too lenient in the past, and thereby being a contributing factor to the precipitation of the worldwide economic crisis. Now they are being criticized for being too harsh with their ratings on Greece, Spain and Portugal, although some may argue that criticisms are politically motivated.

An observation made about credit rating agencies is that they wield so much power that their decisions often become self-fulfilling prophecies. And yet the three largest US credit rating agencies – Standard & Poor’s, Moody’s and Fitch – have admitted that their ratings have been incorrect in the past, such as in spotting the magnitude of the risk regarding the US housing market debt, showing that their decisions are often based on nothing more than an educated guess.

German Chancellor Angela Merkel is among the politicians calling for a European-based credit rating agency, as is the European Union‘s financial services commissioner Michel Barnier who has been quoted as saying that ‘there are not enough rating, agencies, not enough competition, and not enough diversity’. Many agree and view it as unfortunate that matters had to reach crisis proportions before this came to light.