A big idea that is worthy of credit

The SEC is also investigating the role played by the credit rating agencies in developing mortgage-bond deals that helped spark off the financial crisis. In Europe, stern statements have been made by a number of top European politicians. For instance, EU Justice Commissioner Viviane Reding remarked: "Europe cannot let itself be destroyed by three American private companies." There are also plans to set up a European credit rating agency in response to earlier calls by the German chancellor, the Austrian chancellor, the Polish deputy prime minister and Luxembourg's prime minister. European legislators are also considering the possibility of imposing "civil liability" on rating agencies for incorrect judgments on the credit worthiness of sovereign European nations.

The implications of the ongoing onslaught on the CRAs by European and US regulators and politicians are twofold: First there is likely to be a more cautious approach by the big three agencies in the rating of US and European sovereign debt. Second, it is likely to lead to the formation of a Eurocentric CRA and a heavily US and Europe influenced big three CRAs. This could widen the credit information asymmetry between the emerging markets including the BRICS and the advanced debtor economies of Europe and the US.

Since a number of large emerging economies such as China, Brazil, Russia and other oil exporting nations have sizeable exposure to the government and corporate debt in a number of these advanced economies, these emerging countries need access to reliable, transparent and independent credit analyses. With the independence of the big three rating agencies gradually being compromised, the formation of the proposed super-sovereign CRA, which should mitigate against the risk of being pressured by authorities in the advanced economies is timely.

The clampdown on the big three rating agency also presents an opportunity for the new rating agency proposed by Dagong to stamp its presence in the global financial space. As regulators in Europe and the US curtail the influence of the big three, this new agency can exploit the clampdown to gain market share. However, for the agency to gain influence, it would need to be globally recognized, especially by regulators in the developed markets.

One way of gaining this recognition would be for the new rating agency to be registered as an NRSRO by the US SEC. This would give the agency access to the world's largest capital market, thereby increasing its influence. However, this will not be an easy task as evidenced by the fact that none of the current NRSROs have any emerging market influence. In September 2010, the SEC denied Dagong NRSRO status, citing which it claimed to be Dagong's inability to comply with the recordkeeping production, and examination requirements of the Federal securities laws. Some analysts have attributed this rejection to US fear that its dominance in credit rating could be challenged.

To overcome this barrier, the proposed rating agency would need to first get political support from emerging and developing economies. Each of the BRICS nations should officially recognize the new rating agency as a rating organization.

Other emerging markets such as African countries, Middle East and Asian economies should also be encouraged to recognize the proposed rating agency. BRICS and other emerging economies could legislate that before its sovereign wealth funds commit additional investment into the sovereign and corporate debt of advanced economies, these borrowers achieve a target rating set by the proposed agency.

Finally, the BRICS and other emerging markets should also push for the recognition of the proposed agency as an NRSRO by the SEC.

The author, a CFA charterholder, is the macro strategist for Diadem Capital Partners Ltd, London. The views expressed represent the author's personal point of view and do not necessarily represent the views of Diadem Capital Partners Ltd or China Daily.

(China Daily 09/16/2011 page9)