The resignation of Standard & Poor's chief executive of following the agency’s downgrading of the U.S.’s credit rating, reveals the fragility of the whole risk rating system.
Rating agencies are in the pillory, especially after episodes like the mortgage crisis of 2008 - or before that- the shameful Enron episode. It is not helping that it was the president of S & P who was the fuse that went off when the system became overheated by the sacrosanct downgrading of the United States’ rating.
Managers of the agencies insist that they are only issuing opinions and not investment recommendations, let alone guarantees, on the quality of the credit they rate. And they are partly right, because warnings to this effect accompany each and every one of their communications.
What the rating agencies do not say, of course, is that they do not object to their qualifications being considered essential for the financial system, and in many countries, including Costa Rica, financial credit institutions and all debt issuance in the stock market, must be qualified by an approved rating agency. Therefore, many an investment manager will justify their decisions and bad investment losses hiding behind the claim that "the risk ratings were excellent ..."
Beyond credit rating agencies taking the blame, we must also consider the sad role of government agencies who supervise the financial system, which have relied on those rather than doing the audit work for themselves. It is a dangerous expression of fondness for convenience and irresponsibility, typical of many public officials.
Also to blame are failed investors, who want the state to look after them and watch out for their interests when it is imperative that they exercise their own discretion and responsibility, before deciding on any investment.
Reference: Article in El Financiero, Costa Rica, Issue 5-11, September 2011.(Http://www.elfinancierocr.com/ef_archivo/2011/septiembre/11/finanzas2893677.html)
More on this topic
November 2009
Fitch downgraded Mexico's Issuer Default Rating (IDR) from 'BBB+' to 'BBB' in foreign currency and from 'A-' to 'BBB+' in domestic currency.
Both ratings have a 'Stable' outlook. Additionally, the country's ceiling was reduced to 'A-' from 'A'.
Fitch downgraded Mexico's ratings because the country's fiscal situation has gotten worse with the financial crisis and a reduction in Mexican oil production.
March 2011
Moody's downgraded the rating to "Ba2" from "Ba1", citing a continued deterioration of the country's financial condition.
In a statement the rating agency stated, "The metrics for sustainability of government debt (including debt to income ratio) are not consistent with a grade of 'Ba1' in light of the limited prospects for growth the country has," Yahoo News published.
May 2010
Standard & Poor’s rated Panama as investment grade; Fitch did the same two months ago.
The risk rating agency raised Panama's long-term foreign- and local-currency sovereign credit ratings to “BBB-” from “BB+”.
"The upgrade reflects our assessment that continued economic growth--combined with moderate fiscal deficits--should reduce the government's debt burden and maintain its financial profile comfortably in line with that of other sovereigns in the 'BBB' rating category," said S&P credit analyst Roberto Sifon-Arevalo. The outlook on Panama is stable.
August 2011
The risk rating agency has raised the rating outlook from "negative" to "stable" based on the efforts of fiscal consolidation and stabilization of national debt.
The outlook has been "negative" from 2010 due to increasing levels of indebtedness. The rating remained at "BB".
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