IMF says ratings agencies should tighten procedures

Credit rating agencies should be more tightly supervised, the International Monetary Fund’s (IMF) half-yearly Financial Stability Report has said. The IMF says agencies have an impact on funding costs for debt issuers, and can affect financial stability. They can also influence fund managers about which bonds to hold.

The report says that although there are 70 agencies worldwide only three – Moody’s, Fitch, and Standard and Poor’s – have a global scope.

‘Destabilising knock-on’

The IMF has released some analytical chapters from its stability report, to be issued next week. “Sovereign credit ratings have inadvertently contributed to financial instability,” says the summary. “This is because ratings are embedded in various rules, regulations and triggers, so that downgrades can lead to destabilising knock-on and spillover effects in financial markets.”

It also said rating agencies should also be discouraged from delaying rating changes. In addition, policymakers should continue efforts to reduce their reliance on credit ratings, “and wherever possible remove or replace references to ratings in laws and regulations, and in central bank collateral policies”.

‘Fairly accurate’

Credit ratings agencies have been in the spotlight because of downgrades they imposed because of weakened sovereign balance sheets, including Greece’s. A downgrade can push fund managers into selling government bonds they hold, or refusing to buy newly issued bonds. That pushes down the price of the bonds and raises borrowing costs in future, which puts further strain on the government’s finances and could – theoretically – lead to further downgrades.

“In general, ratings are fairly accurate in foretelling when a sovereign is likely to default, though more attention to sovereign debt composition and contingent liabilities could help improve their rating,” said the IMF. The IMF also calls on agencies to ensure their methods are transparent and that there are no conflicts of interest – BBC