Bangkok--21 Jun--People's Daily
After Europe's sovereign debt crisis, Moody's, Standard & Poor's and Fitch Ratings, the top three global financial rating agencies have been criticized and utterly isolated. People now realize that it is extremely urgent to establish working rules in the credit-rating industry.
Financial markets have become more and more complicated over the last century. As an important institutional arrangement, credit ratings were widely used in capital markets, bank credit and trade. Due to the fact that systematic risk was not included in the rating model, credit ratings from top three global rating agencies were shown to have many defects in the U.S. subprime lending crisis and Greece's debt crisis. It showed that rating standards need to be improved as soon as possible.
With the development of modern credit transactions, credit has become a new and individual fictitious form of capital. Credit capital is not only related to financing capability, but also concerns good faith, social credibility and the value orientation of credit. Credit ratings should predict the risk of credit capital. If credit ratings could not be independent of the real economy, then rating results would rely heavily on the real economy, and the drama of a rapid downgrade from "AAA" to "CCC" would happen.
The credit of the sovereign debt of Spain, Greece and Portugal had been downgraded recently, however, how much could the credit of these countries really change in such a short time? This kind of credit rating was not believable, and the market did not need this kind of valueless intermediary service.
In theory, the credit rating service should be an intermediary service led by the market disciplines, not the government. If the credit rating agencies are business entities that only aim to make profit, they should develop in accordance with the market disciplines and enjoy free competition. The agencies should also be managed by corporate governance principles. The shareholders should not have conflicts of interest with the traders and they should not be related to the rating activities or those being rated.
The board of directors and the board of supervisors should include independent directors and independent supervisors. Credit ratings in the United States originated from spontaneous market behaviors but expanded by government support and institutional arrangement. It was the U.S. Stock Supervisory Committee's decision that the issue of bonds should be rated by the top three rating agencies first.
Nowadays, bonds must take a credit rating before they are issued. The credit rating agencies have the final say on any credit risks, therefore, when the rating results provided by the credit rating agencies are completely wrong, the operation of these agencies is completely unaffected. This is not in accordance with the fundamentals of a market economy, and as a result, enhanced supervision should be considered. It was a good start for the U.S. government to discuss the establishment of a Rating Supervisory Committee.
The rating fees and the liabilities of the top three U.S. agencies were also generally questioned. Debt issuers, not the investors, usually paid for the rating fees. The major flow was: after the assessee applied for a credit rating and paid for it, the rating agencies would begin to evaluate and ask the assessee to confirm their rating report. If the assessee challenged the result, the agencies would reevaluate until there were no more disputes. At last, the rating agencies would announce the final rating results.
The investors actually know nothing about the rating process and have no right of speech or supervision in this matter. People have every reason to doubt that the rating agencies are not objective enough due to the inherent conflict of interest. The rating agencies should not be regarded as legal persons because they did not take any legal liabilities. However, the rating agencies should not be regarded as social service agencies because they did not take any social responsibilities either. Their rating report is like a product without any guarantees.
The future rating industry should change the means of charging for their services. Take facility rating for example, the fees could be divided into three categories: the first category is the cost of rating, which should be paid by the assessee or the applicant; the second category is the announcement fee of the rating results, which should be paid by the media and the third category is the report fee of the rating, which should be paid by the investors who need the report.
All fee-payers should enjoy corresponding consumers' rights and interests, and the rating process and the quality of the product provided by the rating agencies should be supervised. Meanwhile, the social and legal responsibilities of the rating agencies should be made clear. It should be noted that the prompt downgrades made by rating agencies not only showed their poor risk-prediction skills but also their lack of social responsibilities.
Since the outbreak of Greece's debt crisis, the debt credits of the euro zone countries were downgraded successively and triggered the depreciation of euro. Europe suddenly discovered that they had no say so in the area of rating. The credit rating set a price for credit capital and rating results determined the allocation of resources on the market.
The credit rating is not just a simple intermediary service, but the right of speech and ideally should allow representatives from various circles of society to participate in resources allocation and the pricing of credit capital. Nowadays, credit ratings are applied to many areas, such as the bond market, the credit market and business negotiations.
The one who controls credit ratings is the one who has say in the allocation of resources in these areas. In a market where credit ratings determine the allocation of resources, if the rating is monopolistic, those agencies that control the ratings industry have the last word.
Credit capital has become one of the most important conditions in the world economy and resource allocation. Having a voice in credit ratings is, in some ways, more important than the credit capital itself.
Different cultures and social customs means different forms of credit transactions, different credit value and different credit ratings. If credit rating agencies are established in Europe, it would trigger a "domino effect." It means that more and more European credit rating agencies would be established, and the U.S. stranglehold on the world debt market would be broken. Therefore, resource allocation would be more balanced and rational.