New Rating Group Challenges Big Three’s Accuracy

Universal Credit Rating Group continues to move forward with its plans to offer the world an alternative credit rating method and expects to release its first ratings as early as this year.

China’s Dagong Global Credit Rating Co., Ltd; U.S.-based Egan-Jones Ratings Company; and Russia’s RusRating formed the Hong Kong-based partnership in June 2013 to provide independent and objective ratings, they said. The trio hopes to reform the current international credit rating system and to support global economic recovery.

“Credit ratings are indispensable in global economic operation, and it is obvious that the current rating system needs reforming and introducing new thinking,” said Guan Jianzhong, chairman and president of Dagong Global Credit Rating and chairman of UCRG, at the platform’s 2013 launch. “UCRG aims to construct a new international credit rating system, which reflects the laws governing the development of our credit-based economy and essential requirements of credit rating; to develop new international credit rating theory and rating criteria; to establish an independent international supervision system for credit ratings; and to communicate the right message about credit ratings to the world.”

Most of the information regarding UCRG comes from various news reports and press releases as few economic analysts have appeared to weigh in on the new organization.

UCRG’s announcement to release ratings this year follows Fitch Rating’s and Standard & Poor’s downgrading of Russia’s sovereign credit rating to BBB-, a step above junk level and on par with India and Turkey. Some analysts question whether the Big Three provide accurate readings of economic situations and believe developed economies receive a free credit rating pass, while developing economies receive more risky ratings, according to a RusRating analyst.

Two of the Big Three have come under fire for allegedly giving high ratings to risky mortgage-backed securities prior to the financial crisis. As the U.S. Justice Department’s case against S&P’s winds down, the government is beginning an investigation of Moody’s Investors Service. In June 2013, Sean Egan, president of Egan-Jones Ratings and director of the UCRG, said, "Obviously there's been a breakdown of the system, obviously there's yet to be any sort of tangible reform. That is really the impetus for seeking some alternatives for global institutional investors."

- Diana Mota, NACM associate editor

1 comment:

  1. It is not difficult to find critics of the three large credit agencies. There are plenty of them including the three new rating agencie mentioned in your article. However the new trio have their own problems to deal with.

    Egon Jones was barred by the SEC from rating Asset-Backed and Government Securities as a NRSRO for 18 months. The SEC found that Egan Jones Rating falsely stated in its registration application that the firm had been rating issuers of asset-backed and government securities since 1995 — when in truth the firm had not issued such ratings prior to filing its application. The SEC’s order also found that EJR violated conflict-of-interest provisions, and that Egan himself caused EJR's violations. As to the Chinese and Russian rating agencies, these are companies which operate in markets that are not transparent. Caveat Emptor.