The judges are judged

IN THE past few months there has been a dark cloud looming over South Africa – the possibility of being labelled “junk” by the major global ratings agencies. Every few months we are told it is imminent, only to survive. It is like being on an emotional rollercoaster.

One would presume that those who judge others are themselves beyond reproach. However, it is not the case with the big ratings companies.

A few days ago ratings agency Moody’s agreed to pay the US department of justice almost R12 billion in penalties related to the 2008 global financial crisis.

What Moody’s failed to do back then was warn investors of the risks associated with the sub-prime market in the US. Instead, it gave these loans an attractive investment grade, prompting investors to invest. But they were not good investments and when they collapsed, they kick-started the worst global financial crisis since the Great Depression of the 1930s.

THE AGENCY said: “After careful consideration, Moody’s determined that the agreement, which removes significant legacy legal risk and avoids costs and uncertainty associated with continued investigations and litigations, is in the best interest of the company… Moody’s stands behind the integrity of its ratings, methodologies and processes, and the settlement contains no finding of any violation of law, nor any admission of liability.”

But Moody’s was not the only agency making bad deals look good. Last year Standard & Poor’s, the biggest ratings agency in the world, paid a fine of about R26bn for doing something similar. Together with Fitch, these two agencies make up 96 percent of the ratings market and determine which countries get investment.

It is no wonder that President Jacob Zuma is sceptical about these agencies. Last year he told the National Council of Provinces that the ratings agencies seemed to have one set of standards for Europe, and another for developing countries.

These global ratings giants appear closer to junk than many of the countries they judge.