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Mix-Ansicht- Ratings agencies post-Enron - leibovitz, 12.12.2001, 14:16
Ratings agencies post-Enron
Trigger happy
Ratings agencies post-Enron: Can you hear the sound of stable doors slamming shut? Enron’s bankruptcy is the latest example of how a horse has bolted only for the ratings agencies to shut the door after the event. As so often before, Moody’s and S&P were slow with their downgrades. Yet again, they failed to act as an early-warning system.
The Enron saga has exposed a particular weakness - how the very act of a downgrade by the ratings agencies can trigger a bankruptcy. The electricity trading group had a cat’s cradle of complex contracts. In the circumstances, when Enron’s first problems started to emerge, the ratings agencies were understandably reluctant to downgrade Enron to junk. Counterparties would have stopped trading with the group. Moody’s and S&P must have feared that they would have been blamed for tipping Enron into bankruptcy - that their downgrades would have been self-fulfilling.
Such circular logic is familiar to so many types of financial crisis - whether in emerging markets, banks or single companies. If everybody maintains confidence, then everything will be fine. But if confidence evaporates, the borrower gets plunged into a vicious spiral. Moreover, a ratings downgrade is just one possible trigger for a collapse in confidence. Remember, in Enron’s case, the counterparties started to withdraw from trading before the downgrades - although the downgrades when they eventually came were the final nail in the coffin.
There is a very simple point here. When a company is susceptible to such a vicious circle as a result of a ratings downgrade, it shouldn’t be investment grade in the first place. The decision by Moody’s and S&P to take such factors into consideration in future may be long overdue. But it is better late than never.
Author: Hugo Dixon
http://www.breakingviews.com/ve.asp?sid=3457&lid=2
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