Introduction: Credit Rating Crisis

Abstract

As the financial crisis morphed into the sovereign debt debacle, and escalating contagion undermined the integrity of Economic and Monetary Union (EMU), plus the global economic recovery, international attention became fixated on what constitutes as the ‘real’ risk of sovereign debt default. While the immediate catastrophe may have been averted, for the moment, the legacy of the crisis still lingers on. Public finances remain strained as governments struggle to retain the investment grades necessary to finance their governmental operations at a reasonable cost. At the heart of the crisis, credit rating agencies (CRAs) have been lambasted for their ‘irresponsible’ behavior and the speculative activity that it fuels which, in the words of the former Greek Prime Minister, George Papandreou, has inflicted ‘psychological terror’ on the poor people of Europe (quoted in The Economist, 22 July 2010). To varying degrees, these ‘masters of risk’ — Moody’s Investors Service (Moody’s), Standard & Poor’s (S&P) and Fitch Ratings (Fitch) — dominate the ratings space and have been implicated in virtually every severe financial and fiscal crisis in recent memory.