What did the 1997-1998 Asian financial crisis leave for us? The answer is either economic recession or political social pain? What’s the answer about the question? It has the pivotal implication. The crisis marked a beginning of a dark shadow of the leading global credit rating agencies (CRA), which are Moody’s, S&P (Standard & Poor’s), and Fitch. Since the advent of the global economic crisis triggered by the subprime mortgage and its derivatives products, the enormous influence of those rating agencies has still been continued. That’s why most of financial system around the globe absolutely counts on those agencies. No, all their say has been taken for granted. Furthermore, there is “Moral Hazard” of the agencies in credit rating.
Who Are They?
Well, it is inevitable to see who the global credit rating agencies are. Moody’s, S&P, and Fitch are the three of the world largest credit rating agencies. Most of those agencies are timed to coincide with the term of the Great Depression. During that time, they won confidence of marketplace by deciding viable companies, simultaneously, began to grow up. As mentioned previously, the global financial market absolutely depends on their credit information. Receiving poor credit rating from those agencies, no one cannot be survived and help facing the crisis. In reverse, the success of companies receiving higher credit rating is guaranteed. Based on this unconditional influence, the sales of the three credit rating agencies have been rapidly increased. Particularly, for five years from 2002 through 2007, that of those agencies has been doubled (from under 3 billion to more than 6 billion). It is due to the expansion of credit rating market concerning mortgage and its derivatives products. For instance, recording the quadruple earning rate for recent five years, Moody’s is boasting of the greatest earning rate among S&P’s list of 500 companies.
The credit rating standard of the three leading CRA is as follows. Except for Fitch, the rest of the three leading CRA has 21 levels from ‘AAA’ to ‘D’ in credit rating. In the case of Fitch, it has 23 levels. According to the Figure 1.1, if the credit rating grade is more than ‘BBB-’ in S&P and Fitch or more than ‘Baa3’ in Moody’s, it is an investment-grade rating. If under that grade, it is a speculation-grade rating. “Fitch currently has an ‘A+’ sovereign rating on Korea.” Though their credit rating standard is open to the public, the rating process is practically not open. In this respect, the objectivity in credit rating is still brought into question
Credit Rating Agencies Has No Credit?
Recently, the three leading credit rating agencies, which are Moody’s, S&P, and Fitch, went back on the most pivotal role on their own in surveilling insolvency on each corporate companies. Rating the financial products of the Wall Street with much higher grade, they exaggerated its bubble dramatically. Furthermore, in return for it, many corporate companies raised their higher rate of income and guaranteed higher gains. As a consequence, those agencies stimulated “Moral Hazard” in the field of economy and finance. For instance, during the period of the global financial crisis and recession, in charge of insolvent investment, the five of the world’s largest investment banks including Lehman Brothers have been in bankruptcy or change the type of their business. For instance, as we know, AIG, the largest insurer of the U.S., was indeed nationalized at last. Furthermore, the collapse of GSE (Government-Sponsored Enterprise) such as Freddie Mac and Fannie Mae was triggered. Nevertheless, the main culprits, who have offered the detrimental information for investors, are still well. At this time, ask back on our own, “Credit agencies have credit?” The answer is “No.” In this respect, at the last G20 summit, as the core of the global financial reforms, the consensus to restrict the excessive authority of CRA and enlarge the institutional watch regarding the CRA was accomplished.
The Raising Alternative
It is fool’s paradise that the organization falling into “Moral Hazard” will be abruptly improved. We ought to find out the best way to get rid of the risk of “Moral Hazard” brought about when vesting the private CRA with power to sustain the global economic system. It is the time that the decisive alternative has to appear. There is the best solution in East Asia, particularly, among Korea, Japan, China, and ASEAN including Singapore and Taiwan because East Asia has the steady real economy and the capacity to invest on a large scale. Some experts suggest those nations will jointly establish the public and independent credit rating agency financed by the central bank created by those ASEAN nations. It will not merely offset “Moral Hazard” of the private CRA, but become the better alternative. Prior to this step, the establishment of common standard concerning credit information among those nations, trust, and understanding among those nations will be premised. It will make the efficient operation of foreign exchange reserves and SWF (Sovereign Wealth Fund) as well. Of course, it is difficult to be achieved, but we should recognize this fact, “when the going gets tough, the tough get going.”