Credit rating agency

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Credit rating agencies - private bodies which evaluate the borrowing power of various issuers: firms, funds, banks, organisations and governments, by calculating the probability that the debt owed is paid up on time with interest. The evaluation relies on the credit score of borrowers and issuers of long- and short- term debt securities alike.

Description

As a result of credit evaluation, a business entity is assigned a rating which is a measure of risk involved with investment in its issued securities. A credit rating aggregates a number of scores from risk evaluation of given economic, social and political factors.

A rating indicates the risk level with which a given country has been classified. This method allows to compare the risk across different countries, since country risk is assessed with the same standards. The cumulative grade of business entities allow to estimate the risk level of a country and decide on the future financial involvement. Independence from local governments of evaluated countries enables a high degree of objectivity. The fact that the data is analysed on an ongoing basis is also a considerable advantage of credit reports.

Criticism of credit rating reports

  • Published reports rely on past data,
  • Choice of criteria for the analysis and their importance affects the rating,
  • Subjective, biased by individual analysis of a rating expert evaluating non-measurable factors,
  • A negative rating can result in a self-fulfilling prophecy

Examples of rating agencies

The number of active credit rating agencies is estimated at 140 - 150. Over 50% of all credit ratings in the world come from three agencies:

  • Standard & Poor's - The agency calculates credit ratings for over 12 thousand issuings by international entities.

Method applied: expert estimates.

  • Moody's - The agency gives ratings to over 4.5 issuers and over 10 thousand issuings from different countries.

Method applied: expert estimates.

  • Fitch Rating - Method applied: expert estimates.
  • FORELAND - Forecast of Country Risk for International Lenders - BERI Instiut
  • Institutional Investor's Country Credit Ratings - Method applied: survey among leading banks.
  • Euromoney Country Risk
  • EIU (Economist Intelligence Unit).

References

Author: Damian Iskra