China's Dagong Global Credit Ratings Co Ltd plans to launch a new credit ratings company called Universal Credit Ratings Group in partnership with US-based Egan-Jones Ratings Company and Russian peer RusRatings, according to an announcement from the three firms recently.
The aim of the new ratings agency is to promote independence and provide an alternative to current credit ratings systems, which they claim are "inadequate to the task of producing responsible and reliable ratings."
In the global financial market, there is always room for more competition, especially if it will promote transparency and independence. However, Universal Credit has its work cut out for it if its goal is to shake up the status quo set by the US's "Big Three" global credit ratings agencies - Standard and Poor's, Moody's and Fitch Ratings. Another big challenge for the joint venture will, of course, be convincing the market that it can indeed operate independently of any country or interest group.
In some recent cases, the motivation behind calls to set up new ratings agencies has been highly questionable. When the financial crisis hit in 2008, many countries began arguing the need to create their own national ratings agencies since the biases of the "Big Three" toward the interests of the US led them to hold off on ringing the alarm bell when signs of the financial crisis emerged. Some even claim that the world's top raters and their pro-US leanings may have aggravated the EU's current crisis. But, with the opponents of these agencies viewing them in such subjective terms, any agencies which emerge to counter these raters may just be trying to protect their own interests rather than provide objective ratings.
For example, the EU announced plans to set up a separate European ratings agency in July 2011 to rival the current market leaders, claiming that the market needed a ratings agency familiar with conditions on the Continent. Considering such remarks, and the cozy ties between many EU governments and the then soon-to-be-established agency, it would have been suspicious to see it handing out excessively good marks to European countries. Such concerns may have contributed to the eventually scuttling of the proposed agency after it was announced in April that not enough investors could be found.
Similarly, for Universal Credit, the first step toward its success will be convincing the market that it does not have any conflicting interests. Only once it has done this can it begin to win market share.
This will be no easy task right now, especially at a time when the global economy is slowing and governments as well as companies have strong incentives to gloss over their financial cracks in the interest of bolstering investor confidence.
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