Moving goalposts for boys in green was part of ratings game
The agencies' failure to sound the alarm on the Quinn Group casts doubt on their credibility, writes Nigel Cosgrave
Published 18/04/2010 | 05:00
THE struggle of the Quinn Group against the wrath of the regulator and the recapitalisation of Anglo illustrate not only a failure of previous regulation, but a failure of the international credit ratings agencies.
Back in August 2007, as the credit crunch hit financial systems, Moody's international ratings agency upgraded the Quinn Group with a "positive outlook". This was despite the fact that Sean Quinn had begun to ramp up his disastrous investment in Anglo Irish Bank.
Less than a year later, Quinn withdrew from its credit rating contract with Moody's. The group claimed that it held little prospect of an upgrade and had no plans to issue debt. The massive Anglo investment was dismissed as a reason.
Was it the prospect that Moody's would finally give them an accurate rating that prompted the move?
When Brian Lenihan announced the latest figures for Nama and the bank recapitalisation plan some weeks ago, most rated it as a black day for the Irish economy. However, the ratings agencies endorsed the latest bailout.
Standard & Poor's (S&P) described Nama and the recapitalisation plan as a "major step forward" in repairing the Irish banking system.
Moody's went even further in describing Nama as an "ingenious mechanism".
These judgements came from the same institutions that gave triple-A ratings to financial products filled with dodgy subprime mortgages.
It was on the back of these ratings that investment banks, like the now-defunct Lehman Brothers, were allowed to effectively sell rubbish all over the world -- and ultimately bring world financial markets to the brink of collapse.
How can we lend these agencies any credence after they gave a glowing recommendation to the Quinn Group as its owner was gambling away billions? How can we respect their ratings now, when it was not able to rate the Quinn Group when this came to light?
The main problem with ratings agencies stems from their business model. When a corporation or public institution is looking to issue debt in the form of bonds, it pays a rating agency to assess the risk of their debt.
Clearly, agencies have a conflict of interest if their revenue streams come from the organisations they are rating.
It's hard to tell how risky Irish sovereign debt is
Another problem is the prestige that is still attached to having a high rating. They are like a Michelin guide for bonds. But after this recession, would you really dine out on their recommendations? Especially, when the companies they are rating are only paying for good reviews.
Critics of the ratings system are demanding that the process be more transparent.
One way to deal with the ratings problem would be to have a system where companies would be forced to pay a ratings fee into a central government fund. The State would then appoint an independent ratings body to either rate debt risk themselves or appoint the agencies to do it for them. While not totally perfect, this would be a more transparent system.
The focus for investors has now shifted from the crippled corporate debt market to the sovereign debt market -- the market for government debt. Barclays Capital forecasts the EU sovereign debt market to rise by about 20 per cent in 2010 to almost €1 trillion.
The ratings agencies still hold massive sway in this area. For countries like Ireland, the rating they receive will be vital to borrow the money they need to plug the government deficit and provide vital government services.
Recently, the ongoing power of the ratings agencies was illustrated with the huge downgrades of Greece's debt by Moody's and Portugal's debt by Fitch's. Even the triple-A rating of the United States and the UK has been questioned by Moody's. It seems unfair that a nation's survival is predicated on the judgements of agencies that are so poorly regulated.
Even the most seasoned of commentators would be hard-pressed to gauge how risky Irish government debt is.
While the ratings of Irish sovereign debt cannot be seen as gospel, we may not be able to ignore them when we have to borrow to survive.