UIIC AO 2016 – Essay – Western Rating Firms are Sometimes Biased Against Emerging Nations

Credit rating Agency (CRA) are specialist commercial firms
that assesses the liabilities of companies, institutions and government to
service their debts. CRAs are not absolute predictor but give subjective view
regarding credit worthiness of companies.

 International rating agency is mainly
dominated by Moody, Standard & Poor and Finch. Of lately, rating agencies
have seen duopoly or oligopoly by these rating players. As these rating
agencies are based and controlled by western world and governments, we have
seen them being partial towards developing nations. CRAs have time and again
come under scanner for their biased and erroneous ratings. They had rated
Lehman and Brothers an ‘A’ rating, a month before its collapse. In past,
collapse of several other corporate giants triggered a series of questions on
role & credibility of CRAs. It is believed that their revenues are
predominantly driven by rating fees earned from issuers.

It is quite apparent that as emerging nations are in the
process of development they cannot earmark funds to up their rating. This
results in developing nations not getting ratings as per their performance and
growth. It has been seen that CRAs denote disproportionate resources in rating
western countries, rather than improving their analysis of emerging nations. Rating
agencies have also been blamed for contributing to economic turbulence by
underestimating the risk attached with the bigger economies of the worlds.

The reasons for such performance of rating agencies are due
to several factors. First of all they are not independent bodies and have
sufficient influence on their decision makings from the government and big
companies who also have been suspected of paying to maintain/increase their
rankings. Second, they have not been held accountable for their faulty predictions
in the past.

CRAs wield enormous power as gatekeeper to financial markets
for companies due to increase regulatory use of ratings. There is a need to
strengthen the accuracy of credit rating agencies and make them more unbiased
towards emerging economies. There should be a regulatory authority to rank on
the basis of their accuracy to rate. Lastly, they should also be held
accountable for their faults and inaccurate ratings, making sure there is less
government interference in their decision making.