THE pronouncements of rating agencies continue to wield tremendous power over the ability of governments and companies to access international capital markets and the terms on which they secure financing.

We warned here that too much confidence was vested in their technical capacity to accurately evaluate credit risk and pointed out that their ratings were in many respects no better than guesstimates.

Rating agencies were assumed to be neutral and scientific. They became the arbiters of financial viability and their pronouncements tended to go unchallenged. Some became extraordinarily powerful, exerting influence over public policy and how governments were viewed by international financial markets.

In November last year, Standard and Poor’s (S&P) downgraded Jamaica from ‘B-‘ to ‘CCC-‘ which indicated that the rating agency saw Jamaica’s debt situation as ‘vulnerable’ and signalled that there could be interruption in debt servicing.

Finance Minister Mr Audley Shaw was forced to scramble to assuage the near panic of an anxious nation and nervous investors. He was clearly correct when he rebutted the rating as “hasty and unwarranted”.

S&P cited the resignation of then Bank of Jamaica (BOJ) Governor Mr Derick Latibeaudiere as the basis for their decision. How do you quantify the increased risk of the firing of the BOJ governor? There is no scientific formula for such a figure to be derived. Indeed, the result was the opposite, because the change at the BOJ improved Jamaica’s economic situation by removing the main impediment to the conclusion of the International Monetary Fund (IMF) agreement and the debt exchange.

In 2003, the United States Securities and Exchange Commission submitted a report to Congress detailing plans to launch an investigation into the conflicts of interest issues among credit rating agencies. Rating agencies have too familiar a relationship with management of the companies they are rating, opening the possibility for corruption, collusion, undue influence or being misled.

The incompetence of the rating agencies contributed to the global financial crisis because they certified as sound many companies and financial institutions which subsequently collapsed. These events have vindicated our warning.

We were not alone in questioning the competence of rating agencies. The accuracy of bond rating agencies has been so dubious that they in reality practice “voodoo economics” as is well documented in The New Masters of Capital by Timothy J Sinclair.

Mario Draghi, chairman of the Financial Stability Board (FSB) recently stated: “Banks, market participants and institutional investors should make their own credit assessments and not rely solely or mechanistically on credit rating agency ratings.”

The FSB has recommended that there should be an end to reliance on credit rating agencies and that reference to ratings should be deleted from financial laws and fiduciary regulations. References to credit rating agencies in rules and regulations should be replaced, ‘wherever possible’, with suitable alternative standards of creditworthiness assessment.

That is, of course, if we wish to reduce the financial shockwaves and market instability caused by their pronouncement of credit ratings.