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Credit Raters Exert International Influence

Painful Choices

Economists say it is all but impossible to isolate the impact of a ratings downgrade from other factors influencing a nation's financial fortunes -- elusive things such as pecuniary politics and monetary policy that indirectly touch the lives of a country's people.

But in the case of the Dominican Republic, some of the nation's choices after the downgrade were painful. Among the first things to go were road building and repairs. On a recent trip, visitors were greeted by the smooth asphalt of Las Americas Highway, which snakes from the airport to the capital, Santo Domingo, but ends in a mass of concrete slabs and steel roads. The government was supposed to finish the 12-mile-long road but work halted this year when the borrowing stopped.

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

Road repair also stopped in the heart of the Neiba region near the Haitian border, where farmers like Rigoberto Caesar Jimenez felt the consequences. To reach Jimenez's grape farm, produce trucks must navigate a dirt road with a ditch along one side. When government crews stopped coming around to fix the road, it became even more of a problem. "Sometimes, I use people who transport grapes by basket on foot," he said.

The government also dropped plans for water-purification projects in impoverished rural areas about 200 miles west of the capital. In one dusty hamlet carved out of the sugar cane fields, the only source of drinking water remained a polluted stream. Altagracia Gonzalez and her family run a pipe from the stream into a concrete pit near their hut. She pours Ajax Cloro, a disinfectant, into the murky, gray puddle to make it drinkable.

But, she said, "I don't know how clean the water is." Sometimes she carries her 18-month-old niece several miles to a public hospital for a stomachache that won't go away.

Many others have claimed hardships resulting from rating downgrades. When Malaysia's credit rating was cut in 1998, the government immediately put the brakes on a $2 billion bond offering that was aimed at helping to resurrect its economy. In recent years, Japan and South Korea have complained about the economic effects of downgrades as well. And in a 2002 IMF working paper, the author wrote that rating companies have been criticized for "precipitous downgrades that exacerbate already stressed situations."

The rating companies say their opinions aren't the cause of economic problems, but rather a reflection of them, as in the Dominican Republic. And yet, Truglia, now the managing director who oversees Moody's sovereign rating unit around the world, isn't sure whether the recent downgrades have compounded the country's economic woes. "It's hard," he said, "to separate it out."

Staff researcher Carmen E. Chapin contributed to this report.

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