Les Agences De Notations (document en anglais).

I. INTRODUCTION

a- Definition



Agencies independents that assigns credit ratings about the financial condition. 


These agencies are responsible for assessing whether a state, enterprise, a community is able to pay its own debt.

It should not be confused with social rating agencies that take into account environmental factors.
Their goal is to just give rates on purely financial.


Since 80’s, this agencies are became the reference to determinate if a country, company or collectivity is solvable. 

Rating agencies are themselves evaluated by the financial markets especially during the 2008 crisis and the Greek crisis.


The three most important agencies are Moody’s, Standard & Poor’s and Fitch ratings.

b- History (Fitch, S&P, Moody’s)

In the 19th century, financial markets develop in the United States and we see appear rating agencies.

From 1837, people need to know the creditworthiness of companies that is why in 1841 the first agency is created The Mercantile Agency.

Key dates of the three major rating agencies

1860: Henry Varnum Poor published "History of Railroads and Canals in the United States"

1868: Henry Poor founded Standard and Poor’s 


1900: John Moody published “Moody’s Manual”

1906: Luther Lee Black founded Standard Statistics


1909: John Moody founded Moody’s Corporation

1913: John Knowles Fitch founded Fitch to publish financial statistics on stocks and bonds

1941: Henry Varnum and L. L. Black merged to form Standard and Poor’s Corporation



1966: The McGraw-Hill Companies acquired Standard and Poor’s Corporation

In response to the various crises of capitalism since 1929, the United States, then the European states, and now the international community, through the G20 and the Basel Committee have used the ratings to ensure the soundness of assets of banks and insurance as well as the reality of the risks taken companies.

So questionable in retrospect, the government has made rating agencies

quasi-regulators.

Liability does not exclude liability administrative, that is to say, the process of registration and control under the responsibility of the European Securities and Markets Authority. It was not until very late in 2007 to United States since 2009 in Europe, the activity of CRA’s became a partially regulated activity

II. CRA’s PROCESS

a- What is a credit rating ?

The credit rating is an assessment of the probability of default of payment of interest and principal on a debt instrument. This is not a recommendation to buy, sell or hold any debt.

b- How does it work ?

Communities, businesses, states issue debt in the financial markets because they need money.

At that moment, the rating agencies involved and noted his debts to allow investors to choose the safest investments.

It's expensive, for example a U.S. company that wants to be noticed at Standard & Poor's must pay a minimum $ 70,000.

Rating agencies are paid by organizations that wish to be noted as states, companies, funds and speculators hedges.

A borrower uses a rating agency, against remuneration, for a note to show the financial strength of its business or its state. Agencies are based on anticipated financial scenarios they échafaudent and assess the likelihood of realization. For a company, the agency considers its prospects for commercial and financial development for a sovereign state, it enjoys growth, ability to raise taxes and spending estimates in the light of its fiscal policy.

Over the note, the higher the company or the state can hope to interest rate loans. The agency provides a rating from AAA to D. AAA means that the borrower is trustworthy and he can repay the loan on time while D means instead that the borrower is in bankruptcy.

c- Example of rating process and weakness in a company

1) Companies paid to be rated by an agency.

Weakness: It is expensive so agencies can be corrupt

2) The agency collects the information needed to study public (annual report) or confidential report, forecasts, strategies)

Weakness: Company can hide data necessary for the study.

3) Based on the report, the agency gives a rate to the company.

Weakness: The Company may step in and provide new information to damage the objectivity of the grade.

4) The Agency then publishes his rates and comments with the consent of the company.

5) The rate’s follow up.

Weakness: Given the large number of rates to follow, the agency can be slow to react.

III. CRA’s PROBLEMS

This system is risky because the three agencies dominate the market; it is their ratings that determine the functioning of financial markets.

- The oligopolistic character of the notation sector, where three companies account for almost all the market. Some experts such as economists of the World Pensions Council consider the recommendations from Basel II forced the European

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