A New York Firm That Shakes Economies
In a global market, credit ratings groups have a growing economic impact.
The way Vincent Truglia describes his work it's the perfect academic atmosphere. He and his colleagues debate arcane financial principles with Socrates-like reasoning. They crunch numbers to validate their theories. They issue grades.Skip to next paragraph
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But from their offices in a nondescript concrete building in Manhattan, he and his colleagues increasingly shape the financial fate of nations. When Moody's Investor Services issues a credit rating, prime ministers call press conferences, currency traders hit the phones, and bond markets quake.
And their ratings are causing more debates - chiefly from those who have just seen their country's economic prospects reduced to a few letters.
In an increasingly interdependent global economy, all the noise over how Moody's and a handful of other private companies rate a country's debt is creating an international stir that highlights the cultural differences between East and West. A case in point is the Asian crisis. While Western investors want "transparency," details on how a country's economy is working,
those in the East say what matters is that it works while maintaining traditional values.
On July 22, Moody's said it was placing Japan's AAA rating under review for a possible downgrade. This prompted Finance Minister Hikaru Matsunaga to complain that he couldn't understand Moody's action. "Japan's economic fundamentals are firm, and this is merely a temporary downturn."
Those ratings, from the AAA US government bonds to the lowly noninvestment grade E, have become increasingly important as foreign countries and their institutions tap the international credit markets for money. Investors want to know whether they are going to get their money back or have to deal with a default, which happened to the debt of nine countries between 1970 and 1990.
"The third-party judgmental role is a very important duty - people are very unhappy when they get surprised," says David Rolley, the emerging-market debt strategist at Boston-based Loomis-Sayles & Co.
For some countries, the credit ratings have become a matter of national pride. After Moody's downgraded Italy in 1993, the country's president accused Moody's of being part of an international conspiracy to destabilize the country.
Ratings, not report cards
Although the rating organizations try to discourage countries from thinking of the assessments as "report cards," many countries do anyway.
"It's not a general report on the whole economic future of the country, it is specifically focused on the risk for creditors," says Christopher Huhne, the London-based group managing director of sovereign ratings for Fitch IBCA, a French-owned rating agency. But, he adds, "A lot of policy makers tend to think if they have a good rating that tends to reflect well on their policies as well."
The ratings do matter, and differences can cost a country a lot of money. For example, last July the Republic of Korea (then rated AA-) borrowed $2 billion. In April, it issued more debt, but its credit rating had sunk. So it cost the country $83 million more in interest expenses.
That didn't stop buyers of the debt - the Korean offering was actually increased in size to reflect a lot of demand. "A lot of people felt they were locking in a spread [the increased borrowing cost] that would improve over time," says Joyce Chang, manager of emerging markets research for Merrill Lynch & Co.
The ratings downgrades may mean many investors don't participate, however. "Everyone is guideline constrained," says Mr. Rolley. "We use them, everyone uses them."
The rating agencies' actions has resulted in a raging debate, particularly in Asia where some view the credit-rating companies as "arrogant." That's the view of Tsuneo Iida, a professor of economics at Japan's Chubu University, who adds, "The activity to rate something with numbers is such an American thing." He cautions, "But, they should remember that numbers don't always represent everything."
On July 27, after Moody's downgraded the debt of Malaysia, the country was forced to postpone a $2 billion bond issue. The delay raises doubts about a recovery plan needed to prop up banks and revive the nation's economy. One newspaper reported that an official called the action "grossly unfair."