Friday, March 22, 2013

The Financial Rating Agencies


The rating agencies are responsible for assessing the risk of a borrower's credit worthiness, which may be a business, a state or a community at large. In other words, they size up the risk of a borrower not to repay its debt. Only financial criteria are taken into account in the scoring. There are around150 rating agencies are there in worldwide but the most important are a few more particularly Moody's, Standard & Poor's and Fitch. They are in the lime light in the recent years due to the worldwide financial crisis. The scoring system, which is the statistical analysis, is more specific to each rating agency and they differ.

For example let us consider the following two agencies which were mentioned above, their possible scores are the best score to worst:
 
Standard and Poor's: AAA, AA, A, BBB, BB, B, CCC, CC, D


Moody's: Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C


Generally, agencies add to their score the medium term may be positive, neutral or negative. Financial markets are very attentive to the ratings agencies. Thus, the rating given by rating agencies has a direct impact on the borrowing rates. AAA borrower can expect to get loans at very low rates (about 3% for the State), while a borrower rated poorly will have real difficulties in obtaining the same loan for higher rate of interest. These agencies have been criticized, especially about the role they played in the Greek crisis of 2010. The European Commission and European governments feel they have contributed to speculation on the financial markets. Evaluation methods of banks by the rating agencies have recently been questioned by the European Securities and Markets Authority (ESMA) after the rating downgrade of a large number of international banks and the lack of stability of their ratings.