Credit Ratings

By: EconomyWatch Content   Date: 29 January 2010

About The Author

EconomyWatch Content

Follow The Money

EconomyWatch, Content Team

 

  • Dot Div
  •      

Credit ratings, in the context of money market, are the evaluation of a potential borrower’s ability to pay back investors or lenders. Credit ratings are calculated from the financial history, current assets and liabilities of the issuing institution. For borrowers or investors, credit ratings form the basis of going forward with the actual transaction.

 

Money markets use credit ratings differently. Although, the concept originated when lending became widespread with most financial institutions that wanted to leverage the scope of revenue consumer lending offered, money market uses credit ratings to assure lenders of the borrowers’ payment capabilities. Commercial papers are often advertised with such ratings.

Money Market Credit Ratings

Credit ratings in the money market are not only different in their application, but also in the way they are calculated and represented. Whilst the consumer credit scores remain a numerical affair, credit ratings for bond issuers use grades for showing the credit worthiness of the bond or commercial paper issuers.

 

The different grades stand for:

 

  • AAA: Highest Safety

  • AA: High Safety

  • A: Adequate Safety

  • BBB: Moderate Safety

  • BB: Sub-moderate Safety

  • B: Inadequate Safety

  • C: Substantial Risk

  • D: Default

 

However, post-financial crisis, things have changed and credit ratings have increasingly become vulnerable to suspicion.

Criticism of Credit Rating Agencies

The large number of cases where the credit ratings appear to be doctored or exaggerated seemed to have triggered a mass criticism of these agencies. Most credit ratings agencies face allegations ranging from incompetence to affiliations or even preferment.

 

The credit agencies have also been criticized for their role in the lending market. Being an authoritative fraternity, their ratings can trigger a vicious circle of increasing interest rates and declining credit worthiness. There might be a situation where a poor credit rating can affect all transactions of a financial institution.

 

Credit rating agencies are also considered oligopolistic for making entry into the money market even tougher. Another area of criticism of these agencies is their rather late action. There have been many instances, such as Enron, where the agencies displayed credit ratings that appeared to be fit for investment just four days before the company declared itself bankrupt.

 

 

 


  • Dot Div
  •      

Most Popular in High Finance

Related Links
blog comments powered by Disqus