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Credit Raters Exert International Influence

Many developing nations, in particular, have a love-hate relationship with credit raters. They often prefer to borrow money on the open market by selling bonds rather than raising taxes or cutting spending as a condition of borrowing from the IMF and other international organizations. As a result, an increasing amount of rating revenue is coming from developing nations, and some critics argue that puts even more global power in the hands of the rating companies. Indeed, bond offerings have become so popular that they recently surpassed bank lending as a source of private capital to developing nations, according to the Financial Policy Forum.

But countries sometimes resent putting their financial fate in the hands of foreign influences. That is certainly the case in the Dominican Republic.

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

During the 1990s, it had one of the fastest-growing economies in Latin America. But building projects often went neglected for decades, overshadowed by the social needs of a nation with more than half of its 9 million people living in poverty on an island about 1 1/2 times the size of Maryland.

The Dominican Republic debuted its first international bond in September 2001, raising $500 million in a five-year issue with a 9.5 percent interest rate. Moody's rated the nation "Ba2," a slightly speculative grade. S&P, using its own grading system, gave it essentially the same score. Dominican officials said they have paid about $100,000 to each credit rater.

Andres Dauhajre was frustrated with the nation's rating. The head of an economic think tank in the Dominican capital, Dauhajre was hired by the government to handle its debt offering on Wall Street. The rating companies, which he said spent about a week visiting his country, focused largely on the central bank's relatively low levels of foreign cash reserves while overlooking a decade of economic strength, he felt.

S&P said its analysts visit the Dominican Republic at least once a year, but the company did not provide details of those visits. Moody's also declined to describe the extent of its visiting.

Things got worse last year when the nation was rocked by a banking scandal that cost the country more than $2 billion. People began stuffing money in their mattresses. The peso went south. And the cost of paying the nation's debt in foreign currency went north. Moody's and S&P downgraded the nation. By the fall of 2003, the Dominican Republic was languishing with the unenviable tag of "very speculative."

Since then, economic conditions have become even worse, and the major rating companies downgraded the Dominican Republic again this year, saying the government may default. Still, some economic experts say the rating companies have acted too quickly.

"The economy is in moderately bad shape, but I wouldn't say it's in the worst position compared to other countries," such as Argentina, said Claudio Loser, the IMF's former director of the Western Hemisphere who is now a senior fellow at the Inter-American Dialogue, a Washington think tank.

Argentina defaulted on $82 billion in foreign debt -- the largest default in history -- in 2001. Economic experts do not expect anything in the Dominican Republic on a par with Argentina's meltdown even if conditions deteriorate further. But rating companies "tend to overreact and, if a country is in a difficult situation, they may aggravate the situation and make it worse," Loser said.

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