Rating Agencies in the EU

June 2, 2004

Over at Truck & Barter there's an interesting analysis of an article about some German banks balking at the idea of the big 3 US rating agencies - Standard & Poors, Moodys, and Fitch - essentially having a monopoly on determining the creditworthiness of European banks. T&B thinks that the Germans are making a mountain out of a molehill, and more concerned with national pride than the consequences of an unsound rating system. While I agree that nationalism seems to be trumping fiscal common sense in this case, the underlying issue remains: we need more independent firms to analyze creditworthiness of corporations and institutions. The current oligopoly is too easily manipulated, as the drive for profits can convince the big 3 to be generous with their ratings. The more firms that perform audits, the harder it will be for a nefarious company to bribe its way out of a poor credit rating. Further, the more sets of eyes that go over a balance sheet, the more likely trouble is to be spotted before the firm defaults. Remember, Enron was still rated "investment grade" by S&P and Moodys just 4 days before it officially declared bankruptcy.