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Credit Raters Exert International Influence

The expansion abroad is having a tangible effect as credit raters often have more sway over foreign fiscal policy than the U.S. government. Last year, for example, American politicians accused China of keeping its currency artificially low to maintain an advantage over American manufacturers. But when President Bush tried to marshal international pressure on China to revalue its currency, rating firms took the wind out of the U.S. campaign by saying it would jeopardize China's credit rating.

Publicly, the rating companies say their international clout is overstated, but privately, officials take note of their growing global importance. About a year ago, when S&P issued a report anticipating more downgrades of European companies, "immediately my phone lights up like a Christmas tree," recalled one S&P official, who spoke on condition she not be identified. "The bond market traded down. I'm not necessarily proud of that, but there's an influence there. We have an immediate impact. Prices get hit across the board."

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

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

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

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

Other major players in the global financial markets have power, too, though not in the same way. Banks wield much influence through their lending and dealmaking, but there are many of them from many nations, all jostling in a competitive marketplace -- and in many countries they operate under tight banking laws. The International Monetary Fund, World Bank and United Nations have vast economic reach as well, but they are ultimately accountable to their member nations. The big three rating companies are regulated by no international bodies, checked by no significant competition.

Jochen Sanio, president of Germany's financial regulator, BaFin, said the major rating companies generally do a good job, but they nevertheless have become "uncontrolled world powers." He said there are "only three rating agencies who dominate the market," and they do so without international regulations "to guarantee independent and transparent rating procedures."

Regardless of regulations, the rating companies say their integrity depends upon being disinterested. If they abused their role, they say, investors would soon stop using their services. They also say their global reach allows more nations and companies to raise money by issuing bonds at reasonable rates.

"We've played an invaluable role in terms of the growth of the capital markets," said Vickie A. Tillman, S&P's executive vice president. That includes "countries being able to raise capital so they're able to invest in their businesses, expand their businesses, create infrastructure projects" such as roads and schools.

Fitch declined to make its officials available for comment, but spokesman James Jockle said in an e-mail, "We believe that if ratings begin to disappoint investors, they will stop using them as a tool to assess credit risk."

Moody's President Raymond W. McDaniel Jr. said his company's work has "benefited both investors and market efficiency. That is a verifiable track record."

A Quiet Power Broker

Martin wasn't the only Canadian in 1995 wondering who was behind the questioning of his country's finances. The press went looking, too. They found Vincent J. Truglia.

Until then, Truglia was an obscure Moody's employee in his forties, a Bronx native and one of hundreds of credit analysts based at headquarters in New York. But soon Canada's news media were calling him more powerful than the prime minister. Interest in Truglia, the lead analyst on Canadian debt, got so intense that reporters tried without success to learn the color of his eyes. (Brown.) But in keeping with the stance of Moody's and other credit companies, who like to keep their analysts in the background, Truglia declined to reveal much about himself. (He remains reticent today. Moody's declined to show his office to outsiders and wouldn't allow his photograph to be taken.)

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