US President Barack Obama has pooh-poohed the first-ever downgrading of his country’s AAA rating by Standard and Poor’s when he said: “No matter what some agency may say we’ve always been and always will be a triple-A country”. But when the credit-rating agency took what some call the catastrophic decision last week, few were taken by surprise. After all, it was a last-minute deficit-reduction deal the president had struck that finally raised America’s debt ceiling and staved off the threat of default. Seen against this backdrop, few would really question S&P’s decision. Credit-rating has always been a problem area that has not received much attention.
There had been many occasions when credit-rating agencies had proved unequal to their task. There are only a dozen or so internationally-recognised credit-rating agencies. Since they charge a fee from the companies they rate, they are often unable to address the problem of conflict of interest. Enron had an ‘investment-worth’ rating, four days before it went bankrupt, though the rating agencies were in the know of all the shady goings-on in the company. Again, it was just three years ago that Moody’s, which had given Freddie Mac a high rating, was forced to downgrade it, when investor Warren Buffett made some disclosures forcing the agency to downgrade it almost overnight. Satyam Computers, whose proprietor is now in jail, proved that crediting agencies and accounting firms were more than willing to fudge figures.
As one of the nations which can be hit hard by the euro crisis and the American downturn that has the potential of a recession, India can take the initiative to reform the credit-rating system. For change to come about an independent agency, under the aegis of the United Nations, with contributions from member countries, should be set up so that it can give ratings that are independent and trustworthy.