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Russia, China and US challenge rating agencies

 
 
 
 
 
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A new agency is about to appear in the rating business that will be created by the Russians, Chinese and Americans. The agency Universal Credit Rating Group that claims to be a global player, came into being in Beijing and is the joint brainchild of the Chinese rating agency Dagong Global, the American Egan-Jones, and Russian RusRating.

Earlier, AFP reported that the Chinese rating agency Dagong planned to involve partners from the U.S. and Russia to build a new international rating agency, because the ratings of the “big three” (Fitch, Standard & Poor’s and Moody’s), according to the Chinese side, are “inadequate.” The U.S. called Dagong “inadequate”, because, according to the American side, they cannot verify the adequacy of the company working in the PRC.

Dagong downgraded the U.S. from AAA to A + in 2010 and A in 2011 before others (S&P – in 2011, to AA + u). Securities and Exchange Commission (SEC) refused to recognize these estimates, citing them as beyond the control of the company. In the statement quoted by Bloomberg, Dagong said that the current international system was not able to produce reliable ratings and promised to provide unbiased information to the capital markets. Three leading world agencies – Standard & Poor’s, Moody’s, Fitch – are among the perpetrators of the crisis, as they distort information about the issuer and its financial condition.

President of the agency Egan-Jones (USA), Sean Egan, said that excessive optimism of the U.S. agencies led to the crisis of the world economy. He added that the current rating system did not satisfy the needs of the investors. Earlier, the Financial Stability Board of G20 recommended reducing the influence of the rating agencies on investment decisions, and the U.S. Department of Justice and the Securities and Exchange Commission in July launched an investigation against the S&P, suspected of unreasonably high ratings of securities, including mortgage bonds of the U.S.

The reputation of rating agencies has been undermined not only by the troubles of the financial crisis, but also by numerous statements by the officials. In May, President Erdogan proposed the establishment of a new rating agency in Turkey. This statement came after the downgrade of Turkey by the Standard & Poor’s from “positive” to “stable”. Erdogan said that the assessment agencies did not reflect the real situation in the Turkish economy, referring to the growth of GDP last year to 8.5 percent. The Prime Minister said that countries benefited from having their own rating institution, which caused doubt in the “adequacy” of the proposed ratings agency.

The three partner organizations of the new rating agency Universal Credit Rating Group (UCRG) emphasized that they did not represent the interests of a particular country or group. Compared to the “big three” credit rating agencies, the members of the new project are ambitious “youth.” RusRating was established in 2001, Dagong Global – in 1994, and Egan-Jones – in 1995. The new structure will not be able to be a serious competitor to Fitch, Moody’s and S & P in the near future. In this business reputation building takes a long time.

However, the national selection of the participants in this project looks very promising – they are the largest markets and economies around the world. It is no coincidence that over 30 credit rating agencies have expressed the desire to join the group. The company’s headquarters will be located in Hong Kong, and the agency will start operating in the next six months. Egan-Jones and RusRating position themselves as agencies that use a business model different from the methods of the “big three.”

The new player in the market will be financed by private companies. As noted by the agency, they generate their revenue through consumer products by the experts of the rating agencies, not by the issuers. This is the main difference of the business model that the founders of the company believe will allow them to avoid financial dependence on the issuers that leads to the misinterpretation of information.

In the next five years, the agency promises to develop uniform rating standards and international standards for the ratings, and create a system of services for global markets, be able to participate in the drafting of the international rankings. That is, it is planning to become a “fourth wheel” in the current three-wheel system of the rating business.

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