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Big Three ratings agencies face competition

PARIS: The Big Three credit rating agencies, under fire for failing to anticipate the global financial crisis, have spurred new players to offer alternatives but the trio’s dominance of the sector seems secure for the moment, analysts said. "It’s a matter of at the same time introducing more competition while making investors less sensitive to …


PARIS: The Big Three credit rating agencies, under fire for failing to anticipate the global financial crisis, have spurred new players to offer alternatives but the trio’s dominance of the sector seems secure for the moment, analysts said.

"It’s a matter of at the same time introducing more competition while making investors less sensitive to the ratings," said Jerome Cazes, head of the French credit insurer Coface.

Coface and another French insurer, Euler Hermes, along with US entities Egan Jones, DBRS and Meredith Whitney Advisory Group, are all anxious to do battle with the Big Three — Moody’s Investors Service, Fitch Ratings and Standard and Poor’s.

The Chinese agency, Dagon Global Credit Rating, has also attracted attention after it downgraded the United States for its massive debt overhang.

"Anything that introduces more competition to the ratings is useful because more diversity is needed if the markets are to work better," said economist Michel Aglietta.

Governments and companies trying to raise money on financial markets traditionally ask a ratings agency to assess their capacity to pay their debt. The rating then helps them in their appeal to investors, particularly those based in other countries.

The newcomer agencies seeking to bolster their positions want to evaluate the financial health of companies and certain public bodies rather than that of sovereign states.

And unlike the Big Three, they are interested in concentrating on a specific region. Meredith Whiney has targeted the United States while Euler Hermes is focused on Germany.

"It is going to be difficult for them because the ratings business will never be a free market," said Aglietta.

But he noted that some of the new agencies that have made an impact in a specific sector, such as Coface in exports or Meredith Whitney in banking, are likely to do well.

"They already have a client base where they enjoy credibility."

Officially, Moody’s, Standard and Poor’s and Fitch appear to have welcomed the competition.

But it is also evident that the obstacles confronting the new players suggest that the trio can be confident about holding on to their top status.

The newcomers must first of all get the backing of regulatory bodies, which some analysts say is a major hurdle for them.

The European Union’s executive commission has said it supports the emergence of smaller ratings agencies in order to ensure greater transparency in the market.

Government authorities have argued that Standard and Poor’s, Moody’s and Fitch aggravated the financial crisis by assigning positive ratings to complex financial instruments that proved to be unreliable.

The agencies have also been faulted for possible conflict of interest in that they are sometimes paid by the entities they are asked to rate.

Nonetheless, the newcomers must still convince borrowers that there are indeed alternatives to the Big Three, whose stamp of approval is considered critical.

"All that is to say that conditions are not yet ripe for a competitive market," said Aglietta.

Under the circumstances, analysts have called for the creation of public ratings agencies or even government support for the new players.

 

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