The discrete charm of credit ratings

By admin
4 Min Read

Hungary’s credit rating has again become a topical issue and for the sake of clarity we should take a closer look at what and how they do, economist Imre Boros writes in Magyar Hírlap.

The three major credit rating agencies each issue their opinion three times a year for several hundred thousands of dollars. They each have ten investment-grade categories and within these systems Hungary is currently at the bottom of the investment grade, so there is ample room for improvement.

But to better understand how they work, let us take a closer look at their history. Market demand for their activity first appeared when giant infrastructure projects such as the construction of the American railway system began and in addition to banks, part of the financing came from the larger – not financially educated – public. These people had a need for authoritative opinion whether these projects are viable, whether they will get back their money and have some dividend from their investment.

The 1907 financial crisis in the United States made this demand even more urgent and even resulted in a demand for an independent assessment of the viability of the state itself. This was the era when the three big credit rating agencies – Standard & Poor’s, Moody’s and Fitch Ratings – took roots. Today the three between them command 95 percent of not only states’, but also corporations’ and banks’ sovereign debts.

But the past two decades also showed the fallacies of these agencies. In 2001 Enron shares – valued at US$90.75 the previous year – suddenly plunged to just one dollar, despite the best, AAA ratings from all agencies. Even Hungarians remember the 2008 collapse of Lehmann Brothers, which ultimately drove a US$600 billion hole in the financial system.

We must also see that the entire system – including the European banks that had been driven to the verge of collapse – has been bailed out by the Federal Reserve to prop up the dollar, the currency carrying about half of the world’s financial transactions. The past two decades clearly indicate that credit rating agencies no longer represent an impartial, independent assessment.

Closer to home, Hungary’s state debt has been on a continuous steep rise from 2002 until 2010, but this was still not enough to downgrade Hungary into the not recommended  (“junk”) category. But shortly after a conservative government came to power with clear economic policies to reduce said debt, Hungary was relegated to the junk category in 2011. It is obvious that the lenders were all too happy to receive the high interest rates from Hungary’s debt and wished this to continue.

More recently, these very same credit rating agencies remained unimpressed by the small economic miracle of the Hungarian economy: dynamic growth, vanishing unemployment, lower state debt and budget deficit, record-high exports and a huge trade balance surplus. Our rating has remained unchanged, whereas there are nine more categories above us.


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