Sovereign Credit Ratings

Background:

Sovereign credit ratings are the credit ratings of sovereign entities, that is, national governments. They indicate the risk levels of the investing environment of countries, by taking a lot of things including political risk and economic risk into account and are used by investors and regulators. With a history of nearly a century, credit-rating agencies have played an important role in securities markets by evaluating the market and assessing credit risk. Among them are the "big two", Standard and Poor's(S&P), under McGraw-Hill Companies, and Moody's, having accounted for 90% of the sovereign ratings market by the end of 1990s.

Although the great influence rating agencies have exerted to the market, critics have still arisen since rating agencies were not always capable to predict sovereign financial crises well, the Asian financial crisis for example, and major corporate bankruptcies like the bankruptcy of Enron.

Decision:

The key decisions in this case analysis are about a) the regulatory use of credit ratings related with the competition among credit rating agencies and b) the regulation of the agencies.

a) Does regulatory use of credit ratings make sense? The available choices are

The regulatory use of credit ratings makes sense and the NRSRO concept should be maintained;

Or the NRSRO designation should be eliminated or modified.

b) Should the government regulate the agencies? The available choices are

Agencies should be self-regulated through the market;

Or agencies should be regulated by the government (e.g. US, EU, etc.).

In my opinion, proper degree of regulation by the government should be imposed to credit rating agencies and NRSRO designation should be eliminated or modified in a way so that there will be more competition in rating industry. The reasons can be derived from the report given.

Firstly, indubitability, credit ratings are greatly needed and significant to both investors and sovereign governments. For investors, ratings, which are a kind of opinions on credit and the risk of default, are the assurance about the future, which will make them feel confident enough to buy securities.