Berating the raters

Last year the rating agencies were slammed in certain quarters for reacting too slowly to market events; this year, there are complaints that the agencies have overcompensated by reacting too fast. So what level of responsiveness will satisfy the bond markets?

Rating agencies – especially the two largest, Moody’s and Standard & Poor’s – have been subjected to an unprecedented barrage of criticism in the past 18 months. In late 2001 and throughout 2002, the rating agencies were criticised for being too slow in downgrading a raft of companies. Much of this criticism was focused on the agencies’ failure to give investors any real warning of Enron and WorldCom’s bankruptcies, in late 2001 and mid-2002 respectively.

In response to this criticism, late last