Credit ratings agencies

Divided by a common language? The European Commission’s close interest in credit ratings reflects not a transatlantic misunderstanding but a global one. Triple A does not, in fact, always mean triple A.

To a point it was ever thus. But the blossoming of complex structured finance has changed things. It has made the agencies look like the willing helpers of fee-hungry investment bankers exploiting the narrower byways of rating policy. And the ratings carry more weight because analysing the instruments is so daunting – even though investors should do their own work, especially when yields look suspiciously high for a certain rating. To be fair, it may be reasonably safe to assume that a structured finance triple A will almost never default. But as investors are finding out and the agencies are belatedly trumpeting, the traditional trappings implied by a triple A rating – a relatively stable market valuation, for example – cannot be relied on.

The slowdown in structured finance issuance has already penalised Moody’s shares and those of McGraw-Hill, parent of S&P. No doubt some investors in rated securities are also hoping to exact legal redress. In the meantime, the agencies need to refine their arguments if they are once again to see off European regulators.