US ratings agencies face Chinese challenge

Deutsche Welle, 19 November 2012

Agencies Standard & Poors, Moody's and Fitch have dominated the global market for credit ratings. But their dubious role in the 2008 financial crisis has highlighted the need for more impartial alternatives.

In early 2008, the big three US ratings agencies. Standard & Poors, Moody's and Fitch, were till issuing first-rate credit ratings for banks and financial products which only months later collapsed in the financial crisis.

Some analysts have criticized the agencies' near-monopoly positions, arguing their inaccurate assessments helped inflate the subprime mortgage bubble in the United States that caused the crisis.

Since 2008, nothing much has changed as the "big three" agencies still dominate 95 percent of the global ratings market, passing crucial verdicts without which the world's finance markets wouldn't work.

However, China's independent ratings agency Dagong Global Credit is preparing a challenge which could challenge the US agencies. In October, it announced plans to form a joint venture with Russian agency RusRating and Egan-Jones Rating, the fourth largest US ratings group.

The three companies said in a statement that Universal Credit Rating Group, as the new agency will be called, intended to issue "impartial ratings" in an attempt to "speed up reform of the global credit rating system."

Dagong Chief Executive Guan Jianzhong said the group planned to be fully operational within the next six months, and that that "dozens" of smaller ratings businesses from more than 20 countries were interested in joining the group, which would be based in Hong Kong.

Doubts about independence

In an attempt to dispel concerns about state interference in the new group, Guan Jianzhong pointed out that his company was a private venture in which Chinese state and party officials had no political influence.

In addition, the three founders stated in their statement that the new agency wouldn't represent the interests of any country or group.

There are doubts as to how
independent Dagong can be

However, doubts remain about the agency's independence as CEO Guan is a Communist Party member with close ties to the Chinese leadership. Before he founded his private firm, he had worked for the government, which still employs him as an advisor.

Such ties are crucial for doing business in China, market analyst Oliver Everling told DW. "It's impossible to set up a ratings agency in China that is fully independent of the state and could act against state policy," he said. Close ties to politics and business were essential for any agency, Everling added.

Business model makes the difference

The new agency arrives amid mounting criticism of the ratings decisions taken by the US agencies and the business model they pursue.

"There is serious evidence that in the past decade a number of European countries were given worse credit ratings than would have been justified in respect to their finances and the general state of their economies," Manfred Gärtner of the University of St. Gallen told DW.

He welcomed the foundation of an "alternative" to the United States agencies, arguing the seat of the agency was of minor importance.

Gärtner said the biggest problem with ratings agencies was their complex network of inter-dependence with the finance industry as a result of joint ownership structures and shared profit interests, which were fostered by close private ties and business locations.

China's Universal Credit Rating Group, Gärtner added, could avoid the typical clash of interest by adopting the business model of its partner Egan-Jones rather than that of rivals Moody's, Standard & Poors and Fitch.

Egan-Jones Ratings charges the investors who buy their ratings reports, while the Big Three are paid by the company or bank which issues a financial product or seeks a rating.

As well as China, Europe, too is making efforts to launch its own ratings group next year - a project which is spearheaded by Roland Berger consultancy firm.

In addition, the influential Bertelsmann Foundation of Germany presented a proposal in spring 2012, suggesting an international not-for-profit agency.

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S&P loses landmark Australian derivatives case

S&P loses landmark Australian derivatives case

Channel News Asia, AFP, 05 November 2012       

                  

(AFP/File - Eric Piermont)

SYDNEY: Standard & Poor's lost a landmark case in Australia on Monday over top-flight ratings given to financial products that collapsed in the build-up to the 2008 global economic crisis.

The Federal Court of Australia ruled that S&P's AAA rating of constant proportion debt obligation notes created by banking giant ABN AMRO and sold to the councils of 13 Australian towns, had been "misleading and deceptive".

It is the first time a ratings agency has faced trial over synthetic derivatives and the case could set an important precedent for future litigation.

Within months of the councils buying the CPDOs from Australian firm Local Government Financial Services (LGFS) in late 2006, assured they had a less than one per cent chance of failing, the notes defaulted.

The councils lost AU$16 million (US$16.5 million) on the so-called "Rembrandt notes", more than 90 per cent of the capital invested.

Judge Jayne Jagot said S&P's assessment of the products as "extremely strong" had been central to the loss.

"S&P's rating of AAA of the Rembrandt 2006-2 and 2006-3 CPDO notes was misleading and deceptive and involved the publication of information or statements false in material particulars, and otherwise involved negligent misrepresentations to the class of potential investors in Australia," Jagot said.

Jagot said S&P had claimed to have reached its opinion "based on reasonable grounds and as the result of an exercise of reasonable care when neither was true and S&P also knew not to be true at the time made".

The judge ruled that ABN AMRO had also been "knowingly concerned in S&P's contraventions of the various statutory provisions proscribing such misleading and deceptive conduct" and had engaged in such conduct itself.

She made a similar ruling on LGFS and rejected the financial agencies' arguments that the councils should bear a part of the blame due to to their "contributory negligence".

Jagot ordered S&P, ABN AMRO and LGFS to each pay one-third of the small mostly mining and farming councils' losses plus interest.

The sale of risky investments such as mortgage-backed securities contributed to the worldwide financial meltdown in late 2008.

- AFP/xq

German companies accuse S&P of profiteering

Deutsche Welle, 23 April 2012

A number of German companies have expressed their indignation at alleged plans by the US Standard and Poor's rating agency to drastically increase fees for assessing the firms' economic performance.

Twelve of Germany's largest companies have sent a joint letter of protest to the Germany head of Standard and Poor's, Torsten Hinrichs, expressing their outrage over alleged plans by the US rating agency to force up prices, the Financial Times Deutschland newspaper reported on Monday.

S & P was expected to double some of its fees for the standard assessment of companies' economic performance; the firms concerned say this would be profiteering.

"Even if S & P has offered to stretch the price hike over three years for exactly the same services, the result would remain unacceptable," said the protest note which was signed by managers from Volkswagen, Daimler, Siemens, Bayer, Eon, RWE, Continental, Lufthansa, Deutsche Post, Henkel, Linde and Bertelsmann.

German companies already paid the US rating agencies about half a million euros annually, the letter said. The three main rating agencies, Standard and Poor's, Moody's and Fitch, have been making most of their profits from the rating of individual companies, and not so much from assessing the performance of whole nations - which for them is more a question of image building.

A case for market watchdogs?

Analysts insist the protest letter is also meant as a signal for German and European anti-trust authorities to step into action. German legal expert Torsten Köber told the Financial Times Deutschland that it's not a problem in itself, if a given provider of services - or a group of providers - dominates the market.

"But things are different, if there's any proof of acquired market domination being misused to the detriment of customers, for instance in a bid to force up prices," Köber said.

The dominant position of the three US rating agencies has long been a thorn in the side of European governments, which have sought to set up an independent agency on their own continent. But the attempts made so far have failed to secure enough financial support from banks across the continent.

Even if a European rating agency were to become a reality, it would take many years to build up the solid reputation it would need before it could become a player among equals.

Author: Hardy Graupner

Editor: Michael Lawton

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Moody’s Salutes Bank Indonesia’s New Credit Card Restrictions

Jakarta Globe, Dion Bisara,  January 18, 2012

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International ratings agency Moody’s Investors Service says the central bank’s new rules on credit cards are positive for Indonesian banks and will help improve their underwriting standards and eventually the quality of the lenders’ assets.

Bank Indonesia issued new regulations on credit cards on Jan. 6. The new rules set the minimum monthly income for cardholders at Rp 3 million ($330) and the maximum credit limit at three times monthly income.

Anyone who make less than Rp 10 million a month is now only allowed to receive credit cards from two issuers. People who make more must be individually assessed by banks.

In a bid to avoid situations where cardholders are trapped in mounting debt, Bank Indonesia banned the use of credit cards to purchase items bought through loans, such as cars or houses.

Moody’s applauded the central bank’s move, saying the new rules would help manage risk in the fast-growing sector.

The new regulations, it said, will reduce lenders’ risk of giving credit card loans to low-income customers, allowing banks to improve the quality of the loans in their “credit card portfolios.”

“Among our rated Indonesian banks, those most affected are those most active in credit cards,” Moody’s said in a statement released on Monday.

These banks included Bank Mandiri, the country’s largest by assets, Bank Central Asia, Bank Negara Indonesia, CIMB Niaga and Bank Permata.

“We expect that these policies will help eventually lower the level of bad debt that the credit card segment currently carries, as well as the threat of future loan loss from lax underwriting practices,” Moody’s said.

Despite credit card lending making up less than 2 percent of the total loans made by the nation’s lenders, the ratings agency said, reliance on plastic has “increased sharply in recent years.”

It said the fast-rising figure reflected Indonesia’s growing middle-income population as well as “banks’ aggressive marketing campaigns.”

The use of credit cards by Indonesians has increased in the past two years. At the end of 2009 there were only 12 million credit cards in circulation; that was 13.6 million and 14.6 million at the end of 2010 and 2011, respectively.

The circulation numbers equate to an average of 100,000 new cards issued per month in 2011, doubling the average of 50,000 in 2009.

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Ratings agencies should not serve as crisis amplifier: China

English.news.cn, by Wang Fan,  2012-01-14                       

BEIJING, Jan. 14 (Xinhua) -- France was stripped of its triple-A credit rating on Friday in a swathe of downgrades in the eurozone, which dealt a blow to the eurozone members faltering in the debt crisis.

The Standard and Poor's (S&P) downgrade move, though containing some legitimate concerns, also raised fresh doubts over the credibility of ratings agencies.

France has been struggling to secure its top-notch rating for months. After several rounds of austerity packages and a massive economic overhaul, its overstretched public finances showed no clear signs of easing up.

From this perspective, S&P's downgrade is legitimate in some sense, but the timing is dubious.

Just one day ago, European shares and the euro rose on positive comments on the region's outlook from the European Central Bank and the news of a successful Spain's bond auction.

Meanwhile, ten-year bond spread of debt-ridden countries over that of German has also narrowed overtime, a key measure of investors confidence.

Spain, Italy and some peripheral countries have waken up to the severity of their structural flaws and introduced a flurry of financial measures to boost their productivity.

As crisis is showing tentative signs of receding, the S&P's overwhelming downgrade has once again weighed on the market and dented investors' confidence.

Having an estimated 95 percent of the global market for credit rating, the three ratings agencies - Moody's, S&P and Fitch Rating, played a pivot part in providing assessment of the ability of countries and companies to pay their debts.

For this reason, it is of great importance for them to be objective and professional in analyzing the market situation. Otherwise, their incorrect information on the credit risk will inflict catastrophic consequences on the global market.

The 2008 financial crisis has provided such a cautionary tale. It is the failure of ratings agencies to assess some risky financial products that contributed to the spread of the toxic assets and fuelled the global crisis.

Meanwhile, investors and markets should wane their over-reliance on assessment of the credit ratings agencies and make their own judgements about the market situation.

With great power comes with great responsibility. In this connection, the ratings agencies should use their power with caution to avoid becoming an ominous amplifier of the ongoing sovereign debt crisis in Europe.

As global investors should be warned about the major risks of the European debt mess, ratings agencies should also do their honest job and not repeat their past mistakes to win back the trust of global investors.

Editor: Fang Yang

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