Credit Agencies And Objectivity (Or The Lack Thereof)

Creating a multipolar world - one can easily say that this is becoming the main priority of many emerging markets. But why? Taking into consideration that there is a structural imbalance in the current world order that permeates into almost all spheres of human life, it’s no surprise that the rising economic superpowers are not going to take this lying down. 

Nowadays, even the market of credit ratings has been tainted by political interests. The so-called Big Three credit rating agencies: Moody’s, Fitch and Standard & Poor’s and their reports and analysis are being called into question for this exact reason. How can one speak of objectivity when the slightest geopolitical upset can lead to a country being stripped of its investment grade under the pretext of a currency crash and economic degradation because of financial sanctions? Not forgetting that the deterioration of the credit rating inevitably lead to further economic complications. 

After such stints in the finance sector, it becomes clear that the world has fallen under the influence of a credit ratings oligopoly, among other things. In 2012, according to the U.S. Securities and Exchange Commission, the Big Three accounted for up to 96% all credit ratings. This impressive figure inherently brings us back to the question of why it is necessary to create a multipolar world. 

While there are numerous credit agencies that serve non-U.S. markets and actively publish their ratings, the ‘triad’ remains unchallenged, and their authority unquestioned. And naturally this has serious economic consequences - after all, we are living in a day and age where increased foreign direct investments are equated with economic growth, and a bad credit rating from any one of the three agencies, be it justified or not, can easily ruin the investment climate, dissuading potential investors from engaging into economic activity in a certain country, bringing the economy to its knees.

So what has to be done to ensure fair competition on the market of credit ratings? There have been several attempts to challenge the reign of the rating agency ‘trinity’ - in November 2013, credit ratings organisations from five countries (CPR of Portugal, CARE Rating of India, GCR of South Africa, MARC of Malaysia, and SR Rating of Brazil) merged to launch ARC Ratings, a new global agency that was supposed to become an alternative.

Naturally the BRICS nations have also brought up the question of creating a joint venture that will serve as an alternative source of credit ratings. The head of VTB, one of Russia’s leading banks, Andrey Kostin spoke to the Russia News Agency TASS about the idea. Mr. Kostin correctly pointed out, that the BRICS should be mindful, as the creation of such an organisation should under no circumstances be portrayed as a challenge to the already existing ones, as the agency will then be considered politicised which will undermine its authority and reputation.

Interestingly enough it is not only emerging markets that have had to bear the grunt of the credit rating agency oligopoly. Great Britain and France have also had their fair share of problems with the Big Three which naturally had an impact on the financial markets. The moral of the story - no one is immune. 

With almost more than 90% of the market share concentrated in the hands of three main agencies, it’s not surprising that credit ratings may be very far from objective. However barriers to market entry are high and those who do manage to break into are usually disregarded due to the fact they are not widely-recognised. So how exactly does one go about breaking this vicious cycle?