Does anyone know how these work please? Wikipedia does not explain much.
I have just been watching the film Inside Job about the US financial crisis. I always assumed these three rating agencies were independent but it seems they are in the pay of the finance industry (i.e. use "issuer-based" finance to operate), which can get high ratings out of them for the junkiest of junk bonds etc. This partly explains the crisis as many investors have been ruined on their say-so. But two questions remain:
1-Do countires also pay for their ratings? I was very suspicious when Fitch said it was going to down-rate France and then, after protests from Sarkosy, decided it was OK after all.
2-Since no country or finance company is likely to pay for a bad rating, how do bad ratings emerge? (Maybe as a consequence of not paying up?)
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I don't work at any of them, but as I understand it.
1. I don't think so no. They look at various stats and come up with a rating.
2. Poor economic outlook for company or country.
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Companies only get rated if they pay. The one I work for is rated by Moodys but not the other two.
There's quite a lot on the Moodys website about how the ratings work and how they arrive at them.
www.moodys.com/
You'll find some press releases on there as well, regarding ratings changes. They go into detail about the rationale, e.g.
www.moodys.com/research/Moodys-downgrades-Safeways-Senior-Unsecured-rating-to-Baa3-outlook-is--PR_234811
I haven't read that one, but often a change in a company's rating will be to do with its market or the economic outlook where it operates as well the company itself.
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Moodys/Fitch/S @ P - sooty123
