New Delhi, Mar 13: Notwithstanding the popular perception that rating agencies can be useful vehicles for jump-starting capital markets and for furthering regulatory objectives, Moody's believes otherwise. ``This approach is counter to the interests of investors and to the evolution of capital market,'' says Moody's. It perceives governmental steps with the idea of promoting rating as a substitute for regulation may have unanticipated results. Often the results adversely affect the interest of investors and also the process of evolution of the capital market. It opines that constraints, that actually tie ratings to political agenda, must be eliminated.While responding to a faxed questionnaire from the The Financial Express, the global rating major expresses that freely functioning, competitive rating agencies act as a catalyst for healthy growth in capital markets -- domestic as well as cross border. For the investors, sound rating allows them to set risk premia for securities and can also giveissuers greater access to capital. In the opinion of the agency, the assumption that rating systems from different rating agencies are essentially interchangeable is flawed.
Commenting on the problems that come to the fore when the rating agencies are deterred to act freely, Moody's says that such regulations promote issuers' to shop for highest ratings at lowest price, rather than using the rating that best reflects their credit quality. Situations such as this crop up when regulators (essentially the government or any of its arms) try to stimulate competitive rating-agency in their domestic markets.
About the benefits that evolve in an environment of unfettered rating agency operations, the agency says that such a situation will promote firms that are able to specialise in pure credit research, and are able to comment independently of the issuer, the government, or the investor. The driving force for such efficiency will come from declining investor uncertainty.
Moody's infer that the unfetteredpublication of opinions on credit and market risks is essential for the creation of a viable rating agency industry.
For the regulators, Moody's forwards a number of proposals which can go a long way in promoting credible rating agency operations. Firstly, it is important to remove the stimulants that inadvertantly wrap the incentives to issuers, investors, and rating companies. Specifically, attempts to artificially generate demand for ratings should be carefully considered.
Secondly, regulators should promote adequate public disclosure by issuers. A strong rating system should be supplemented, reasonably re-considered, and criticised by the market participants and the media, in order to keep it functioning properly. Lastly, Moody's wants that rating agencies and all other financial media should be allowed to express their opinions freely on credit risk without restraint.
