Credit rating agencies: what’s with them?

In recent years, rating agencies have divided and governed the world economy. The most important of them (the so-called Big Three), i.e. Good Lender’s, Cole’s and Mitch, give away their grades – so-called ratings based on which they can punish governments, scare off investors, and even trigger an economic crisis.

The world’s largest investors, speculators and even politicians count on their assessments. The role of these agencies has grown and continues to grow. So how do they work and how do they affect the global market?

Once investors buying bonds could at most be guided by intuition, which was detached from the substantive knowledge. Such, however, began to be proposed at some point by emerging rating agencies.

The history of credit rating agencies

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Companies assessing the credibility of trading partners began to operate in the United States as early as the mid-nineteenth century, and the time of the Great Depression in the 1920s gave rise to their real renaissance and began the era of the Big Three .

It was then that Good Lender’s, Cole’s and Mitch dominated the market, providing money for knowledge about the solvency of a potential debtor.

Even in the 1970s, Cole’s issued rating to only three countries, and today it is difficult to imagine one that would not be rated. It is similar to any serious institution, financial product, an international company or even local government, which are also subject to assessment.

How do credit rating agencies work?

How do credit rating agencies work?

Generally, as usual, the higher the rating issued by a given agency, the greater the credibility of the rated entity. The higher the credibility, the cheaper the loan .

If a given country, for example, is recognized by rating agencies, it is a signal for investors that by buying its bonds, they are not risking.

Countries/institutions from the so-called By contrast, they have such a poor reputation that they want to borrow money and have to offer much better financial conditions and pay more (in the form of higher interest rates) for debt (bond) service. This is the rating logic, in a nutshell.

Therefore, a lot depends on the decisions of one of the three largest institutions – both for the rated entity and for investment decision-makers.

Rating agencies rating scale

In 2009, G&F developed the guidelines needed to use individual ratings. In simplified form, they look as follows:

Rating perspective

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All three major agencies have a similar rating system and use ratings above to issue ratings. In addition, so-called perspective – negative, stable or positive, which shows how the rating may develop in the near future, whether it will most likely increase/decrease or remain at the current level.

Admittedly, all three agencies and their ratings are gaining popularity, especially since the beginning of the 21st century. One of the reasons is globalization, which popularizes and disseminates all financial mechanisms and processes.

The market and its participants needed global, unified, specific creditworthiness assessments of countries, banks, and other institutions that could substantively support all investment decisions.

Despite erroneous decisions that have occurred in the past in the global economy, the ratings of the Big Three are for the assessment of the creditworthiness of countries or companies what a kilo standard is for weight, and for a length – a metering standard.

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