La evolución del comercio exterior ecuatoriano desde la adopción del dólar

Figure 4.1 segregates the main problem drivers of CRAs into four groups, as identified by the European Commission (EC) (EC, 2011a). Those lead up to the six main consequences which finally list four resulting global issues. However, there is a problem with how the executive body specified and identified some of the issues when forming of CRA regulation.

Two of the problem drivers are more subjective and judgemental whereas others are reasonably objective. For instance, the first box in the second pillar states: “Insufficient objectivity and

completeness of the sovereign rating process”. This is questionable since it is difficult to judge the objectivity of the CRA by the regulator. Claiming that the sovereign process is incomplete is also serious accusation without any underpinning evidence. The comparison of the press releases justifying rating actions before and after the regulation was introduced might lend hand to investigate whether these accusations had validity at the time of the EC report. For example, Moody’s in its press releases before 2011, such as a downgrade of Hungary on the 22 December 2006, includes a short section on the details of the rating action such as the issuer and its location. There is a brief description of what determined the rating to change. This together with the details of the managing director and the senior staff close the section which does not exceed 1 A4 page (for downgrade of Hungary see Moody’s, 2006; for downgrade of city of Athens see Moody’s, 2009). The press releases of rating actions after 2011 provide much more detail about the rating process. For instance, the downgrade of Greece on the 1st July 2015 and a change of outlook on Hungary on 7th November 2014 provide relatively extensive analysis of the performed creditworthiness assessment (Moody’s, 2014; Moody’s, 2015b). Firstly, documents consider the rationale for the rating change and the key drivers of the outlook changes respectively. The anticipation of what could drive the rating up or down from the current state is also explained. Further, press releases provide macroeconomic indicators such as GDP per capita, GDP growth, inflation, fiscal and external balance among others. Finally, the publications include the details how rating/outlook changes fit the regulatory disclosure rules. As in the earlier reports the CRA gives details about its analyst and managing director followed by the releasing office. The length of the document exceeds the 3 A4 pages and is an indication of the improved transparency standards.

Further, the box “Inappropriate timing of ratings publication”, which was an immediate criticism after downgrading the EU countries too fast, in the same pillar (as well as the last box in the last pillar) raises another question. At the time when no regulation was in place there was

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no appropriate time for releasing rating news. In addition it might be harmful to restrict the natural workings of the market?103 (see section 2.6.4 for more details). On the positive note, the problem driver identified in box 3 of pillar 1 “Investment strategies directly linked to

ratings” has been empirically investigated and demonstrated by Cantor et al. (2007), and references therein.

Additionally, the EC’s subjective view is expressed in the list of consequences in the next column -“Insufficiently sound credit rating methodologies and processes”. It is controversial to claim that the processes are inadequate without providing evidence. CRAs were blamed for failing to predict defaults of Enron and during WorldCom as well for the rise of Asian crisis in the 1998.104 In addition, the failure in the structured finance market added to their growing criticisms. Lack of transparency regarding methodology CRA regulation did not reveal the methodologies applied by CRAs and the CRAs were regarded as black “boxes”. Therefore, it is understandable that the EU regulation tried to deal with these issues after the outbreak of the financial crisis. The issue remains however, as to how much CRAs can interfere into the working of CRA industry.

The Problem Tree also lists the main four global problems claimed to exist as a result of the listed shortcomings of the CRA industry. However, the two out of four problems do not have any sources of evidence. Namely, “Low confidence in financial market” and “Undermined

investor confidence” have not been supported by any academic literature and mean exactly the same thing. On the contrary, the rate of issuance has increased in the recent years which could indicate that investor confidence has not decreased. As it stands ratings classes are bundled together by policymakers when such judgements are being made. They should be separated into structured finance and the rest rather than being generalized. For instance, the criticisms are valid for structured finance where the number of issuances has significantly dropped since the breakthrough of the financial crisis (see Table 4.3b). One could speculate about the sovereign ratings while the corporate ratings market is booming and the investor confidence has not shown any sign of depreciation (see Table 4.3b). Such generic statements are misleading and show a lack of substance. This oversimplification is either a consequence of negligence or an attempt to make the regulation easier to push forward and implement. As can be seen in the Figure 4.1 the illustrated problems have also been lifted to the global scale. By

103. According to CRAs III regulation the sovereign ratings are supposed to be released after the close of business (Friday) and at least one hour before opening markets (Monday).

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inflating the problem the regulators can better justify and validate their regulatory actions, especially allowing assignment of a greater weight onto the possible resolutions.