[G20 summit agenda ] Regulating credit rating agencies: An unfinished business

The following is the 12th in a series of articles analyzing the major problems that the G20 leaders should tackle to stabilize the global financial markets and rebalance the world economy. -- Ed.

Credit rating downgrades can have significant negative effects on financial markets.

This month, the euro dropped against the U.S. dollar to its lowest level since 2006. The fall of the common European currency occurred amidst market uncertainty about the effects of a $1 trillion rescue package designed to shore up Greek and Eurozone markets as well as global financial stability. At the same time, there has been a growing criticism of the role of credit rating agencies and renewed calls for their regulation.

Indeed, the judgment that the Greek budget deficit for 2009 would be significantly higher than expected led to rating downgrades of Greece’s government debt by all three major rating agencies, starting in December 2009 (to BBB+ for Fitch and S&P and A2 for Moody’s). As credit markets punished Greece with higher borrowing costs, credit rating agencies downgraded Portugal and Spain’s debt. By April 2010, Portuguese spreads reached their highest level since 1997 following its downgrade to A- from A+ while spreads for Spain increased as S&P downgraded credit rating to AA.