By Wendy Adams
Over the past few years there have been discussions amongst the BRICS (Brazil, Russia, India, China, South Africa) countries to open up their own rating agency that will compete with the big three credit rating agencies – that is, Standard and Poors (Samp;P), Moodys and the Fitch Group. Samp;P and Moodys are based in the US.
Since the 2008 global crisis the big three credit rating agencies have been under tight scrutiny, following risky mortgage-related securities that contributed to the collapse of the US housing market.
The crisis began when thousands of US homeowners stopped paying interest on their mortgages. The crisis spread because thousands of bankers and fund managers had imprudently backed those mortgages. They did this partly through their own lack of foresight and diligence, but also because of the ratings agencies failure to warn them of the risks involved.
As a result both banks and funds lost a great deal of money. In the run up to 2008, a staggering proportion of mortgage-based debts were rated AAA, when in fact they were essentially junk. Ratings given by rating agencies start from AAA (the highest rating), then comes AA1 and so on down the scale to C. Anything below BBB is known as junk.
This blog forms part of a special series of student articles on global governance.
Due to the financial crisis, the big three rating agencies are being criticised for their perceived lack of awareness of the risks which led to the crisis, and for the dominance they have on the market.
The credit rating agencies rate the creditworthiness of companies and currencies, and through this they give investors an idea which investments are safest to make.
Credit rating agencies are important and they have a major impact on todays financial markets, since rating actions impact on borrowers, issuers and governments: for example, sovereign ratings play a crucial role for the rated country, and a downgrade can have the immediate effect of making a countrys borrowing more expensive.
Although the BRICS have yet to open their own agency, in 2012 five international rating agencies across Asia, Africa, Europe and Latin America entered into a joint venture to create a new global rating agency, ARC Ratings, which is meant to cater to the new multi-polar world in direct competition with US-centric agencies.
Three of these rating agencies are from the BRICS bloc – Brazils SR Rating, CARE Rating of India and GCR of South Africa. They are partnering with CPR of Portugal and MARC of Malaysia. ARC Ratings will be challenging the dominance of the worlds big three, which at present account for over 95% share of the global ratings market.
Representing four continents, ARC aims to rebuild and enhance reliability and transparency in the international credit rating industry which has suffered an immense loss of credibility in the wake of the financial crisis.
A rating from credit rating agencies is important for African companies as this helps to boost investors confidence across all assets and further helps with the development of Africas capital market.