Credit Rating Agencies
A credit rating agency is a powerful company that rates how good you are in paying back your debts. It rates businesses, private individuals and even whole countries. The credit rating company gives a score on how able you are to pay back a debt or a loan.
Banks take risks when they lend person money. If they don’t know anything about the person or company they lend money which they may not see ever again. The same applies to a whole country. If a country is in money troubles and it goes to banks to seek loans the banks must be sure that they can pay them back.
In the last few months and years problems on the European financial market have arisen because credit rating agencies have downgraded countries like Greece, Portugal or Ireland, making it more difficult for them to borrow money.
The rating of a credit rating agency has an influence on how much interest you must pay for a loan. Individuals, companies or countries with very good ratings usually get money at lower interest rates, whereas having a bad rating means that giving you money is a risky business so you have to pay more interest.
Although there are many credit rating agencies all over the world, three big ones that have the most power and influence: Standard & Poor’s and Moody’s, two American-based agencies control about 40 % of the market each. The third agency, Fitch ratings, controls about 14% and operates from New York and London.
Credit rating agencies collect all kinds of information on firms, companies and countries.
The agencies get paid by the companies or businesses that want their bonds or shares rated.
Agencies have different methods of rating. The best possible rating is AAA, or triple A. This means that you can borrow money cheaply. Ratings can go all the way down to C or D, meaning that companies or businesses are not able to play back money and are basically bankrupt.
In most cases credit rating firms also assess how businesses, regions and countries will develop economically in the future. For example, The United State's rating was downgraded by Standard and Poor’s a short time ago to AA+ , because the agency thought there was a slight risk of borrowing money from the American government. Such a downgrading can cause the loss of a good reputation of a country or business.
Criticism of these credit rating agencies has come up in the past months and years. During the global financial crisis of 2008, the agencies admitted that they did make mistakes in their ratings, which led partly to the crisis. The rating agencies gave best ratings to borrowers during the housing crisis in America. It turned out that many were not able to pay their debts back.
Discussion has been going on about the importance of rating agencies. Some financial experts doubt that they are needed at all. European politicians criticize the fact that they are dependent on American rating agencies.
- able = to be in a situation where you can do something
- admit = to say that something is true, even if you don’t want it to be
- agency = firm
- although = while
- American-based = they have their command centre in America
- apply = work for
- assess = measure, find out
- bankrupt = without enough money to pay back
- bond = an official document that promises that a government or company will pay back money that it has borrowed from you
- borrow = to get something and give it back after a certain time
- business = company
- business = here: task, job
- cheap = not expensive
- criticism = to say what you think is bad about something
- debt = the money that you have borrowed from someone and must give back
- dependent on = need
- develop = grow
- doubt = to think that something may not be true or if you do not trust something
- downgrade = to give a lower rating
- economically = about the economy
- financial = money
- global financial crisis = between 2007 and 2009 in which many banks around the world collapsed and had to be helped by governments
- importance = meaning, power
- individual = a single person
- influence = power, control
- interest rate = the extra money that you must pay to a bank when you borrow money from them; in percent
- lend = to let someone borrow money form you for a short time
- loan = the money that you have borrowed from a bank
- loss = to no longer have something
- method = way
- operate = work
- politician = person who is in politics or works for the government
- rate = to give a number or a score, based on the quality of something
- reputation = name, status
- score = number, rating
- seek = want to have
- share = the part of a company
- slight = small