“Critically evaluate the role of credit rating agencies such as Standard and Poor’s and Moody’s in promoting well-functioning capital markets. How well are the agencies performing their roles?” – December 2013 past paper

Credit rating agencies are private profit oriented entities that earn revenues for issuing opinions on the credit worthiness of sovereign governments, corporations and a variety of specific debt issues and issuers. They enjoy a high level of credibility in the investment community and their opinions are extremely influential. Credit rating agencies first emerged in the United States in 1909. They initially issued ratings solely for the debt obligations of the railroad, which had catalysed the development of a global bond market to finance their expansion. The advent of credit rating agencies in the early 20th Century reflected the emergence of highly capital intensive industries in the USA and the corresponding expansion of capital markers to finance them. Over recent decades, global capital flows have accelerated as sovereign borrowers, notably in the developing world, turn to private capital markets for financing needs previously met by commercial and development banks, as well as multilateral agencies. The two major credit rating agencies are Standard and Poor’s and Moody’s Corporation. Standard and Poor’s is now a wholly owned subsidiary of the McGraw Hill Group of companies,, while Moody’s Corporation is the parent company of Moody’s Investor Services. Credit rating agencies in essence, issue an opinion on the likelihood of default. The opinion or rating is typically presented in the form of a letter grading system (eg. AAA) and an outlook. The outlook is the potential direction of a long term credit rating. Credit ratings fill the informational needs of the institutional investors constituting the target market for sovereign