Moody's, Standard & Poor's, and a couple of other rating agencies downgrading Korean debt to junk bond status sparked a run on the won on Monday. This is typical speculative behaviour, when any piece of bad news is seized upon to justify selling. While there is little doubt that the rating agencies are justified in downgrading the ratings of the countries affected by the Asian flu, the timing of the downgrades could be controversial. The international rating agencies, like the World Bank, the IMF and practically everyone else, had no inkling of the crisis which has unfolded in the region. If anything, their reactions have been rather slow. And when they do downgrade, it leads to panic selling, and consequently there is a large element of self-fulfilment in their predictions. This is of course, not the first time that these criticisms have been directed at the rating agencies.

Even in India, our domestic rating firms have been criticised for being wise after the event, and reacting far later than the rest of the market. To be sure, there is merit in the rating agencies' argument that their concerns are different from those of the markets, and they are only concerned with whether the loan will be repaid.

But if credit analysts are unable to spot signs of weakness before the rest of the market, what purpose do these rating agencies serve? The problem is perhaps that while rating agencies are dependent upon the skills of credit analysts, the debt market has the advantage of being based on the opinions of thousands of informed players, including credit analysts. Perhaps the rating agencies in turn need to follow the signals emanating from the markets more closely.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.