Tygh Essay

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DOI: 10.1007/s10272-011-0389-0 Forum Credit Rating Agencies: Part of the Solution or Part of the Problem? Credit rating agencies have come under increased scrutiny since the financial crisis. Their failure to recognise the threats to the financial system prior to the crisis coupled with their steady downgrading of European sovereign debt has led to much criticism, especially from European politicians and economists. This Forum examines the major agencies’ influence, independence and performance and explores whether a publicly funded European agency would improve the situation. Gunther Tichy Did Rating Agencies Boost the Financial Crisis? Most observers, journalists from the yellow-press to trade journals, politicians and even economists feel absolutely confident that the rating agencies (henceforth RAs) bear a formidable responsibility for boosting the financial problems of several peripheral European countries into liquidity and even solvency crises. The three big RAs are regarded as all-powerful, mysterious, ignorant, corrupt and unregulated. A specialised European rating agency is demanded, or at least some form of regulation and control of the incumbent agencies. The professional literature, however, is more differentiated, at least as to the rating of sovereign risks. The recent financial crisis with the downgrading of Greece and, to a lesser extent, of Ireland, Portugal and Spain, affords an opportunity for a further test of the validity of these public charges. This paper starts with a review of the existing literature. It will then provide some information about the rating market and on the pattern of sovereign rating. This is followed by a case study of the RAs’ justifications for downgrading Greece; Greece has been selected as the problems culminated in this country, and Moody’s provides most of the material, as it is the only agency providing a full

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