Credit Rating Agencies
How three private companies in New York determine borrowing costs for governments worldwide, and the controversy over their power.
The Big Three
Three companies -- Moody's, Standard & Poor's (S&P), and Fitch -- control roughly 95% of the global credit rating market. Their letter-grade ratings (AAA down to D) determine borrowing costs for governments, corporations, and financial products worldwide. A single downgrade can add hundreds of millions of dollars to a country's annual debt servicing costs. When S&P downgraded the United States from AAA in 2011, it sent shockwaves through global markets.
The agencies' power is partly regulatory. Many institutional investors -- pension funds, insurance companies, central banks -- are required by regulation to hold only investment-grade securities. When an agency downgrades a country or company below investment grade (from BBB- to BB+, the 'fallen angel' threshold), it triggers forced selling by these institutions, amplifying the market impact far beyond what the underlying risk change warrants.