The performance of the principal credit rating agencies (Standard & Poor’s, Moody’s and Fitch) was widely criticized when the crisis emerged in 2008. Various issues, ranging from the technical quality of their evaluations to possible conflicts of interest, ranked as important aspects affecting the perception of risk in the financial instruments that touched off the crisis.
Now it is the European stock market supervisory agency, the European Securities and Markets Authority (ESMA), that, after a detailed examination of these companies’ evaluations of European public debt, is documenting the anomalies and bad practices in which they appear to have engaged.
ESMA has done well to undertake such an evaluation, given the influence these agencies exert on the functioning of the markets of public debt and of credit in general; and, in short, on financial stability. The investigation was carried out between February and October of 2013, and the conclusions indicate important deficiencies in four major areas: independence and resolution of conflicts of interest; confidentiality of information; the timing of publication of rating changes; and the resources devoted to the study of the solvency of states.
The president of the ESMA said the investigation revealed anomalies in the process of qualification of sovereign debt, which may imply risks to the quality, independence and integrity of ratings, and of the processes followed in determining them.
One of the most notable anomalies concerns the direct influence exerted by the directors of these companies, compromising the necessary independence of the analysts responsible for the qualification.
The fact is that the conflicts of interest between these tasks of credit evaluation and others of supplying advice to those institutions being evaluated create a powerful incentive for objectivity to be displaced by interests other than strict technical rigor in the supply of the rating. The procedures used, the degree of confidentiality with which the information is handled, the choice of timing for the publication of this information and the methods for appealing a qualification also come in for criticism from the ESMA.
Stronger guarantees needed
There have to be stronger guarantees of the reliability of these ratings, and of the integrity of those who produce them. The availability of really objective and independent evaluations is one of the necessary conditions if the financial markets, particularly those of fixed-income instruments, are to be sufficiently extensive. At the same time, there has to be an end to the oligopoly that de facto dominates this activity, opening the door to other agencies that can evaluate with the necessary technical skill and independence.
We can only hope that this step taken now by the ESMA will not be an isolated episode. Confidence in institutions is always necessary, but when their functioning affects the financial markets, it has to be both rigorous in the detection of anomalies and decisive in the application of such sanctions as may be required.