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Gatekeepers: Shaping Nations' Wealth

Credit Raters Exert International Influence

By Alec Klein
Washington Post Staff Writer
Tuesday, November 23, 2004; Page A01

Second of three articles

Canada's finance minister was fuming.

On the 21st floor of the government complex in Ottawa, Paul Martin glared at his aides and demanded: "Who the hell are they to pass judgment on us?"


Moody's angered Canadian Prime Minister Paul Martin -- then the finance minister -- when it downgraded the country's debt in 1995. (Chris Wattie -- Reuters)

About This Series

MONDAY, NOV. 22
Unchecked Power: The world's three big credit-rating companies have come to dominate an important sector of global finance without formal oversight. The rating system has proved vulnerable to subjective judgment, manipulation and conflicts of interest, people inside and outside the industry say.
Moody's Close Connections
When Interests Collide
Graphic: The Rating Game

TUESDAY, NOV. 23
Shaping the Wealth of Nations: As more countries rely on the bond markets to raise capital, they have been forced to accommodate the three top rating firms. The credit raters often have more sway over foreign fiscal policy than the U.S. government.
Transcript: Post Writer Alec Klein
Smoothing Way for Debt Markets
Graphic: Moody's Expansion

WEDNESDAY, NOV. 24
Flexing Business Muscle: Lack of oversight has left the rating companies free to set their own rules and practices, which some corporations say has led to abuses. The credit raters have rated companies against their wishes and ratcheted up their fees without negotiation.
New Choices for Consumers
Graphic: Raters' Big Misses

_____World Markets_____
Global Economies
International Stocks

The target of Martin's anger: Moody's Investors Service, which had just made an announcement that stunned the financial markets. Moody's, one of the world's major credit-rating companies, had placed Canada's debt "on review for a possible downgrade" -- a signal that it was concerned about the country's finances.

News spun around the world. Almost instantly, the Canadian dollar dropped by about a half-cent against the U.S. dollar. The central bank didn't announce it, but behind the scenes it scrambled to stop the slide by buying back several hundred million dollars of its money. Investors dumped Canada's bonds and drove their interest rates higher, which would cost the government hundreds of millions of dollars.

The warning by Moody's in late February 1995 -- not even the downgrade itself, which came later -- was enough to roil financial markets and send a major sovereign nation scurrying to restore order.

Martin, now Canada's prime minister, acted quickly to allay Moody's main concern. According to government officials present at the time, he inserted stronger language into his budget speech to emphasize the need to attack the nation's debt, using such sturdy terms as putting "our fiscal house in order" and citing the "dangers of the deficit."

At the time, nations were just beginning to awaken to the widening influence of credit-rating companies. Since the Canadian clash, changes in the global economy have further strengthened the gatekeeping role of Moody's and its main competitors, Standard & Poor's and Fitch Ratings. The flow of international capital has surged, and nations that want to borrow their share have been forced to accommodate the big three rating firms.


With the credit raters' stamp of approval, nations borrow about $20 trillion -- about 40 percent of the debt floating worldwide -- to build roads, schools and other projects that help to define a society. But access doesn't come cheap. From Canada to the Dominican Republic, many have complained bitterly when their bonds were graded lower than they thought they should have been and their cost of borrowing rose accordingly.

For the credit-rating companies, there's an incentive to rate as many nations as possible: They make money by directly billing each country for the service. At Moody's, for instance, international operations, which include sovereign ratings, accounted for about a third of its total revenue last year, and grew by 32 percent -- nearly double the growth rate of Moody's U.S. operations.


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