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The recent credit ratings downgrade for the U.S., Poland, Ireland, Greece, and Spain impact customer sentiment and confidence in the economies of these nations. While the ratings agencies are charged with portraying a lucid picture of a nation’s creditworthiness, the ratings agencies themselves are coming under scrutiny, primarily for the role political influence plays in these ratings and their methodologies in measuring risk.
The credit rating agencies—whether S&P, Moody’s or Fitch—are being questioned about the ethics of their rating schemes. The current used issuer-pay based model is facing skepticism and momentum is building for an investor-pay based model.
Many financial services industry experts are also questioning the largely un-regulated functioning of the rating agencies. Regulations such as the Dodd-Frank Act include provisions to safeguard against political influence on credit ratings, but implementation of these regulations is uncertain. It gets more complex since these rating agencies have global operations yet are governed by regional regulatory systems. Although the quest to find alternatives to the credit rating agencies has accelerated, there are no potential replacements on the horizon. The sooner the regulatory bodies implement ethical practices in the ratings agencies, the better.

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