Credit Rating Agency
Standard & Poor’s (S&P), Moody’s, and Fitch Group are the “Big Three” Credit Agency that are no stranger to the investment world. AAA, Ba3, Ca, CCC… they looked like some high school rating but these are also the ratings designed to inform interested parties. The ratings are given to large-scale borrowers, whether companies or governments, and are an indication to buyers of this debt how likely they are to be paid back.
So, how influential are these credit rating agencies? According to wikipedia, as of 2013 the “Big Three” hold a collective global market share of roughly 95 percent with Moody’s and Standard & Poor’s having approximately 40% each, and Fitch around 15%. Borrowers are usually referring to the rating given by these agencies and cross-checking each of these ratings. For instance, Malaysia has a A- rating with Stable outlook by Standard & Poors, A3 with Stable outlook by Moody’s, and A- with Negative outlook by Fitch. Recent development been Fitch might downgrade Malaysia’s rating further (http://www.msn.com/en-my/money/topstories/fitch-says-it-may-downgrade-malaysias-rating-in-upcoming-review/ar-AA8nTgH) due to its structural weakness from high reliance to Petroleum income, and also the reduction in GDP forecast.
So, how does this impact Malaysia? If a country is deemed to have suffered a downturn in fortunes and its rating is lowered, investors may demand higher returns to lend to it, as it is judged a riskier bet. Hence, the score card will affect the amount that the government is charged to borrow money. Looking back into the market share by each of these agencies, it is not difficult to derive that only a downgrade by Fitch would not hurt Malaysia so much until both Standard & Poors and Moody’s do the same. Due to the dominance of Moody’s and S&P, the norm for debt issuers is to obtain ratings from these two, and only occasionally turn to Fitch, for example if Moody’s and S&P disagree.
Are Credit Rating Agency always right? Not quite. You will get the answer by reading here. Back before the 2008 subprime crisis, the agencies’ ratings played a critical role in the marketing of risky mortgage-backed securities, such as collateralized debt obligations – the investments that were backed by mortgages that were either never going to be paid back or were even fraudulent – were given the very best grade by the three supposed experts in rating the likelihood of the money being paid back. These financial products turned out to be virtually worthless. And the sudden realisation that they were rubbish, rather than gold-plated investments, triggered the financial crisis in year 2008.
Though they have learned a big lesson and improved from there, rating systems are not 100% fool-proof. But, with the absent of other more reliable sources, these agencies are still the most sought after resources from the borrowers’ perspective.