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AAA Credit Rating—would impact world economy

Syed Shah Salim Ahmed

Salim932@googlemail.com

Today’s` Britain’s news top topics big three- credit company’s credit grading, as Britain’s three A credit rating now `negative outlook` By the Moody`s.BBC,BSKB,Channel four, TyneTees  Television, Channels are doing live coverage and discussing about this.

It’s now hot topics in the city how the credit-rating agencies work, are they any influenced by any  political parties or any sorts of myth, what they are wanted to deliver the financial sector and beyond, etc.? So many questions are in mind, and peoples is thinking, is there any political stunt or peoples mind trying to divert the other way from the focus of economic crisis or from cut deficits? Any effect down grading or upgrading or overall  good rating should any effect on the society or people’s daily life because of peoples are really suffering for cut deficits and fearing losing their jobs.

As general peoples quite understood that bank, finance company always relied in credit reference agencies before lending or taking decision they normally consult with credit reference agencies, whether lending or not. Credit reference agencies don’t have to take any parts of decision making about lending, but they only provide up to the dated information’s regarding the clients’ financial history, nothing else. On the basis of credit reference agencies information’s lenders taking their decision with their own policies. But AAA credit-rating agencies? It’s totally different from the consumer’s credit reference agencies like Experian and Equifax. These three big credit-rating agencies are dealings with nations and international over all economic situations and after consulting and having all factual data, informations for borrowers and investors and issuers, and they will issues simple letter where stated nation’s credit rating situation. Nations to nations their credit ratings obviously varied available information’s and this will be hugely an effect in the country’s economy as well as borrowing capability from the world financial market and investor as well.

Moodys`, Flitch Ratings, Standard & Spoors are the three major credit rating companies.

MOODY`S: – Moody’s` Founded in 1909. It has an office inCentral London,Uk. There are 4,300 professionals employees working in this company. Moody’s` has 27 worldwide offices, headquarters inNewyork,USA. So far, in 2010 company’s revenue was £396 million` Recently downgraded countries are Hungary, Slovenia, Italy, Portugal; Spain and today’s news focused in UK`s credit rating stated as`Negative Negative Out Look.`.

FLITCH RATINGS: – This credit rating company was founded in 1913. It has 2,000 professionals throughout their 51 worldwide offices. Flitch ratings have dual headquarter, one is inNew York,USA and other one inLondon,UK. Last 2010 it has revenues £415 million sterling. It recently downgraded countries likeItaly,Spain,Belgium andCyprus.

STANDARD & SPOORS: – This was founded in 1860, have 7,500 professionals in 21 worldwide offices. Their headquarters is inNew York,USA. 2010 earned revenue £1.83 billion including McGraw-Hill Financial. Recently downgraded countries areFrance,Austria andBelize.

Following the very recent down grading of the French, Italy, Portugal, Spain and other countries by the big credit rating company named Standard & Spoor’s, and now in Britain credit rating is `negative out look` By the another credit rating company named Moody, it has been in influence and very tense focusing in the current world over all economy growth and rating by the credit-rating agencies.

We already understood about the AAA and the `Big three`-like Standard & Spoors`,Moody,Fitch Ratings-any one us sure what they are doing or can their ratings by any fairly or have any accountability by the Finance Watch dog, whatsoever?

So far, we got the information from the Moody’s website and thereafter later through Mr. Daniel Piles,head of EMEA media relations at Moody’s that “Credit ratings are opinions on the likelihood that a borrower will repay a given debt over a medium-term time horizon.” He added, “ Debt can be issued by the corporate, banks, municipalities or sovereigns. That means potential lenders need to have a view on whether borrowers have the capacity to pay back a debt on time. Our ratings help bridge the information gap between a borrower and a lender.“. (Source news focus on 9th feb.12, metro, bbcuk).

Credit-rating agencies just play a beneficial role through providing the right information between the clients and borrowers, discussed risk factors, and not playing any role about decision making, whether lenders issue loan or credit to their clients or borrowers. Their information’s about credit worthiness are accurate, correct and up to the dated according to they are claimed in their site.

Mr. Piels added more that“It`s important to note that they are just one among a rating of tools to inform the markets` discussion on credit risk, though.“.

In the context of microeconomic market analysis and research need to be much developed because of recent big three’s credit rating down grading of the big growth economic nations include US Government. Because the macroeconomic context we see the different scenarios that may emerge and information’s, they achieved directly from the issuers or lenders. Publish a credit rating on a scale of letters only by the agencies, it’s never ever evaluated or analysis by the third parties or financial authorities, which those don’t have any access or have not any scope to do input any information’s or analysis their opinion on their tools which they have stored.

Although Moody’s credit rating always monitoring and forward looking, which will change to reflect the evolving nature of the credit environment, said Mr. Piels. However, it’s not clear whether this monitoring by any  independent accountable bodies or  beyond, should understand it has been monitored by their own inner organizations follows by their policies.

So` As credit risk increases, our rating will change accordingly. Ratings may also change as the result of refinements. We make to our methodologies, which are transparent, publicly available on our website and from the basis of our ratings, he added.

Today’s debt market becoming more regulatory as issuers need ratings to keep their interest costs down to attract investors, so that investors need the ratings to help them decide to lend.

However, information’s should be made available for everyone, not in closed-door  relationship.

As we see whole credit worthiness or market is in under controlled by the three so-called  big credit-rating agencies which they only represent a small group. Its has so many potentials focuses on the market regulatory and economies but negative impacts concern growing  as well, like investment fairness, overall grade on focus, huge influence over policy without any democratic accountability.

There has a potential conflict between interests and exists, with over every business model. With this three credit rating company’s also roll a potential monopoly in the market economy, which have dramatic effects in the financial crisis as well?

On the contrary, of risk, economic environment big three should also have the factor of evolving credit crisis, which should be evaluated and analysis by the independent watch dog.

I am not differing from their rating, but this should be done by the democratic way and must have democratic accountability.

Whether policy or rating process should go through democrating consultation way and implementations may have the right to be made for publicly open as published.

Because in the context of current free economy market, no one has been playing role or made the game with monopoly, entire stake holder’s ,developers,investors,financial institutions have the full equal right to play the role with highest competition into  the market economy environment. All other statutory agencies include banks, finance, insurance, parliament, etc. every institution should responsible and accountable for their work, whether government, non-government, or as privately owned, or as PPI investment in terms of their business and culture, to their authority or auditors. However, the consequences about big three agencies have not any accountability like others has the democratic way done by the laws and legislation. Central Bank or Central Bureau of agencies could not touch them even they not exercise any consultation with the central bank before input data into  their system or stored or before published rating with their rating letter to the country or in hands to the company. The question is where they are rightly accountable about the Credit Ratings? Simple answered still consequences. This should be done further in-depth research for the sake of right, accurate, concrete, impartial job to be done by them, especially in current conflict economic situation.

Currently UK`s  governments are facing lowest ever inflation, jobless peoples more than three million since three years. Euro-Zone is facing real crisis since established Euro, continues euros are fallen, adding more countries bad debts in every fiscal year. It is quite understood about the risk factors of debt, and every stakeholder is in risk. However, it doesn’t mean that big three has the right to do monopoly with any proper accountability.

REFORM PROPOSAL:-As I have the information from Finance Watch, where the reform’s proposal underway.“As part of the suggested reforms to credit rating’s agencies, Finance Watch is keen on abandon the idea of a letter-based ratings system. The European Commission wants to reduce the reliance of market participants on CRAs. Finance Watch proposal for achieving this is to delete all references to ratings from regulations, making it difficult for investors to use ratings in their internal rules. The highly emotive letter-based ratings system would be replaced with a simple, boring number that reflects the probability of default (which is the only thing that investors need to know anyway).The The The old AAA system should be thrown away completely.“. (Source from Mr. Ford explained, CRAs, 9th feb.12).

Sources: BSKB live coverage on 14th February 2012

BBC lead news analysis on 14th February 2012

Big three credit-rating agencies website, 2012.

Haley Leavers analysis publications on 9th February 2012.

Salim932@googlemail.com

14th February 2012.

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