The lack of regulatory action partly reflects the lobbying power of the Big Three.Ĭredit-rating agencies have also been accused of enabling the United States’ subprime-mortgage bubble, which triggered the global financial crisis when it burst in 2008, and of exacerbating the bust through rapid reversals and downgrades. The ratings agencies were certainly fooled: The Big Three all issued Enron investment-grade ratings just days before the company collapsed. Enron, an energy-trading company, had been using accounting tricks and complex financial instruments to mislead investors, creditors, and regulators about its value.
The accountability of rating agenciesĬoncerns about ratings agencies were first widely expressed during the Enron scandal in 2001. And many institutional investors, required by law to hold only ‘investment-grade’ assets in their portfolios, must abide by the rating agencies’ verdicts. Bolstering their authority, the US Securities and Exchange Commission has recognised them as official statistical rating organisations. These oligopolistic firms are market movers and makers, influencing financial portfolio allocations, the pricing of debt and other financial instruments, and the cost of capital. And there is significant cross-shareholding among them.
Just three – Moody’s, S&P Global Ratings, and Fitch Ratings – control more than 94 per cent of outstanding credit ratings. This points to a systemic problem in international finance: the extraordinary – and undeserved – power wielded by a few private credit-rating agencies. But now, the threat of ratings downgrades is casting a shadow over these countries’ prospects. For many countries, it offers the best chance of making their debt burdens sustainable. Whereas the DSSI aims to provide immediate relief to low-income countries during the pandemic, the Common Framework was designed to help debt-distressed sovereigns reschedule or reduce their liabilities. For that, the country apparently must be punished. Rather, Moody’s has concluded that the Ethiopian government’s commitment to engage with private creditors, as part of the G20 Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative, raises the risk that those creditors will incur losses. The problem isn’t violence and repression in Ethiopia’s embattled Tigray region.
On 10 March, the credit-rating agency Moody’s placed Ethiopia on review for a downgrade.
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