Thursday, April 14, 2016

Dan Steinbock — Credit Agency Criticism Continues in the Wake of China's Downgrade

In the past two decades, the criticism of the leading CRAs has increased in the advanced economies. It began with the internet burst of 2000-2001 and then continued with the subprime mortgage crisis after 2005, the global financial crisis in 2008-9 when hundreds of billions of securities that had the CRAs' highest ratings were downgraded to junk, and the European sovereign debt crisis since spring 2010 when Brussels blamed rating downgrades for crisis escalation.
From huge energy companies, such as Enron, to Wall Street's financial giants, the credit agencies - so it seems - have looked the other way, when the world's largest financial conglomerates have engaged in excessive risk-taking.
As the major advanced economies no longer fuel global growth, large emerging economies - China, India, Russia and Brazil, among others - play an increasing role in these prospects. In these economies, criticism against the large ratings agencies has also increased since the Asian financial crisis of 1997-98 and the recent downgrades, which reflect substantial capital outflows and other challenges.
In advanced economies, criticism focuses on the CRAs' professional conduct. In emerging and developing economies, it also addresses the issue of fairness. As the past two decades suggest, the CRAs are not immune to professional biases, moral hazards and conflicts of interests. According to critics, the problem stems from the extraordinary concentration of the CRA industry.…
Credit extension largely determines the allocation of financial capital, which is used to grow real capital through investment in "capex." Therefore, the financial sector has a high degree of control over who the winners and losers are in the name of reducing risk, which is the bottom line of investment decisions, and therefore of capitalism. The Big Three play a key role in this process. Is the playing field tilted?

Credit Agency Criticism Continues in the Wake of China's Downgrade
Dan Steinbock

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