In the murky world of Credit Ratings

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The Eurozone saga is a pointer to the fact,that almost two years after the housing mortgage crisis , the financial markets continue to be volatile and destructive, with hedge funds running amok and junk bonds and Credit Derivative Swaps ruling the roost. Despite ECB and IMF support the Bonds of the Eurozone nations continued to be hammered with more than little help from the credit rating agencies, as the EU and the IMF watched helplessly.

The market players shorted both the Euro and the soveriegn bonds of Greece, Spain and Portugal as Standard and Poor lowered Greece to junk status and Portugal and Spain a few notches above. S&P further said yesterday in a statement that Spain's debt rating could be downgraded further if the "budgetary position under performs to a greater extent than we currently anticipate." It was indeed a uncalled for threat since it did not qualify what their current anticipation was, and on what basis.

The nexus between the market raters and the market makers has long been a concern , especially since the 2008 credit crisis when the duo acted irresponsibly to first push up the markets beyond control, and then bring it down crashing. It was one of the areas where reform was needed and the lawmakers have hopefully looked into that aspect in the US financial reforms bill.

The Bill is unfortunately aiming for too much. Hence it is likely to get bogged down with pressure groups in each area working for its demise....and chances that they join hands to pull it down. Though political battles in the U.S. Senate or any other nation is inevitable,in a democracy,it works better and quicker for any nation, if segmented steps are taken towards reform. With the U.S. Bill crucial to set a order to the world economy, it becomes all the more important that parts of it it are executed quickly and completly do away with the rot.

The 1300 page financial reform bill to be introduced in the U.S. Senate next week will be converted into a bill well after next year,if at all, as it is a mammoth doctrine that will be bitterly contested and negotiated in the Congress.The size of the Bill and the its content was so humungous that it leaves no scope for early passage.

The reform of CRA's (credit rating agencies) and the transparency and the norms needed while rating an issue will be a matter of concern to all before the passage of the bill takes place. Current actions by the CRA's lead independant observers to believe that they are still playing with the market makers and not really acting independantly. This is probably not due to any official directive at the CRA's but the fact that most CRA's draw their staff from the same resource pool as the hedge funds, and their is often conflicts of intention not interest.

Since the 2008 crisis, the Big Banks and the punters have only grown stronger to become the unchallanged masters of the universe bolstered by the TARP funds that once again churned out super-profits for themselves, even as the other sectors struggled to recover. If they grow unchallanged to run riot in the markets, plant their people at the rating agencies or with the regulators, they will destroy stability and lead to uncontrolled volatility in the credit markets.

The EU internal commisioner Micheal Barnier issued a gaurded statement after S&P's action “We, of course, expect that credit rating agencies, like other financial players, and in particular during this difficult and sensitive period, act in a responsible and rigorous way". However it was too mild and rather ineffective . By comparison Indian regulators have achieved a miracle, with command control vested with the regulators, that the Western nations, that are far too privatised have struggled to achieve.


India's market regulator SEBI recently caused ripples when it issued a circular asking all 4 credit rating agencies that operate in the country to report its rating criteria at least twice a year along with historical data on default. Besides the 4 rating agencies that operate in India namely Fitch, Care, Icra and Crisil were told to disclose their fees structure with clients to ensure total transparency and accountability.

This was a welcome move that ensured, that credit rating agencies behave responsibly in view of the European crisis, as emerging economies are prone to hiccups in the world of high finance. The fact that India closely monitors its FDA, and rejects any doubtful finance makes it a secure investment habitat, where foreign funds behave responsibly. The big daddy's of the credit rating world namely S&P and Moody have been also kept at bay, as they are known to cause unnecessary turmoil in the markets with their habit of re-evaluation at the time when markets are most volatile