More to your thoughts on the ratings agencies: Who reached who here? This is untypical behavior modification on the part of the ratings agencies. (See: Story 2 below)
The SCMP story "rating the raters" (See: Story 1) details the fact that many of the rating agencies have been behind the breaking wave here and not in front of it.
For private use only
Thursday January 15 1998
Editorial
Rating the raters
One of the casualties of Asia's economic woes has been the credibility of international credit rating agencies. From their desks in New York and London, these supposed early-warning systems not only failed to predict the current crisis but were among the last to appreciate its consequences.
Moody's and Standard & Poor's continued to rank Thai government bonds as grade A until last October, three months after the baht's collapse. Both agencies only downgraded their ratings for Yamaichi Securities days before the Japanese investment house's bankruptcy last November. Fitch IBCA, Europe's largest rating agency, has now admitted that it and its rivals made serious mistakes, partly because they were too far away to predict how Asian leaders would react to the crisis.
Rather than show similar contrition, Moody's seems intent on trying to erase memories of its earlier over-optimism by veering towards extreme pessimism. Its decision to consider downgrading the short-term ratings for the SAR Government, its two railway corporations and three leading local banks bears little relation to the credit-worthiness of these institutions.
The Mass Transit Railway Corporation now has a lower gearing ratio than at any time in two decades. The inclusion of Hongkong Bank shows a failure to understand the situation in the SAR, where it is smaller banks rather than such giants which might be at risk from the collapse in property prices.
Such ignorance is not surprising. After Moody's downgraded the ratings of local banks last November, Financial Secretary Sir Donald Tsang Yam-kuen revealed that it had not even bothered to give the Government a chance to make representations beforehand. Standard & Poor's, which did contact Sir Donald, decided against any downgrading.
Unsurprisingly, the market may be becoming less influenceable by ratings. Far from falling in response to the latest announcement, the Hang Seng Index has risen for two days in a row. Brokers are understandably confused by pessimism when rival agencies are leaving their Hong Kong ratings unchanged.
Rating agencies should provide a reliable guide to the riskiness of alternative investments. Recent events raise questions about how well at least some of them are playing this role.
SCMP Jan. 21 story on another look at European bank lending to Asia
Moody's Investors Service yesterday appeared to step back from a much-criticised decision to review several European banks believed to have been hit by the Asian financial markets crisis.
Moody's, in what it said was a comment on recent rating actions on 10 banks in Germany, France and Britain, said East Asian markets were not likely to be of significant harm to the creditworthiness of most European banks in Europe.
The embattled US credit rating agency said, however, the more general effect was likely to be negative.
"This exposure puts further strains on some of these banking group's fundamentals" and might result in a marginal deterioration of risk.
Moody's said there seemed to be evidence that European banks, which had sought to expand quickly in Asia, had failed to properly weigh up the lending risks, and that smaller banks with less internal resources were likely to face pressure as a consequence of the crisis.
Moody's warned it could still take fresh action against other banks, particularly if the ramifications of the crisis broadened.
Last week, the ratings agency sparked anger when it announced it had put on negative review 10 European banks including five from France, four from Germany, and one - Standard Chartered Bank - from Britain.
Moody's admitted that for most European banks, their East Asian and other emerging market activities represented only a small portion of their overall business, asset and funding base, which was still mainly skewed to their home market.
It said, however, that European banking exposure had grown rapidly in recent years, as trade and financial relations between Europe and the region expanded.
Moody's said that, according to the latest data from the Bank for International Settlements, the exposure of French and German banks to South Korea, Thailand, Indonesia and Malaysia was larger, on aggregate, than even banks from the US.
"Furthermore, the decision to expand activities in East Asian markets would fit naturally in the strategy of a large banking group with a diversified global franchise, although in many instances this expansion has been pursued more opportunistically, without due concern for an appropriate correlation between short-term returns and longer-term risks.
"In addition, European banks with more modest profitability and economic capitalisation have inherently less internal resources to weather out major international crises such as the current East Asia downfall."
Moody's said it was particularly looking at large credit exposures that might have been built up to Indonesia, Thailand, South Korea and Malaysia to corporate or financial institutions, as these were most likely to harm bank asset quality.
"Higher loan-loss provisioning should therefore depress recurring profitability and even deplete economic capitalisation, especially for those banks with more modest capitalisation."
This exposure puts further strains on some of these banking group's fundamentals
Yet another SCMP Story "Moody's may cut HK ratings"
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