Borrowers less willing to pay for a rating

The reluctance of credit ratings agencies to promote their views to a wider audience is a backward step in the creation of a better retail investor market for debt securities. The existence of credit ratings is not essential for the development of a retail market but as experience has shown, here and elsewhere, without the existence of an objective means of assessing credit quality, investment decisions will be made, for better or for worse, on the basis of name recognition. This will not lead to the development of a large efficient market.
   
For Standard & Poor's (and presumably Moody's) the value of their credit ratings must now be questionable to Australian entities. Credit ratings are essential for accessing wholesale debt markets but if they can no longer be used to promote retail business then their value is diminished.

The ratings agencies' customers will be even less impressed if they are eventually compelled to obtain a separate credit rating from an alternative supplier, for their retail business, at additional cost. No doubt, they will seek to offset this additional cost against the fees that they pay to their current provider.
 
Looking for an alternative agency that can meet all of their requirements would seem an attractive option. Only Fitch Ratings has the international standing and credibility to replace S&P and Moody's: but Fitch has so far kept quiet on its position in relation to this matter.

It seems that there are only three possible resolutions to this stand-off. ASIC can relent, and given that its stance in this matter appears out of step with the requirements now being imposed on ratings agencies by regulators globally, this may be the best way to go.

Alternatively, S&P (and Moody's) can relent, and resign themselves to the effective creation of an Australian national rating scale to deal with the discrepancies that may result between Australian ratings and international ratings, if this is really necessary.

National rating scales are used where there is a need, that is, there is a sound business rationale, to do so. S&P of course built its local business on the foundations of the former Australian Ratings.

The third option is for S&P (and Moody's) to exit Australia and try to carry on its Australian business from offshore.

While it is not clear that this option would avoid the regulatory constraints now being imposed, John Bailey said it has not been mentioned and is not being considered.

S&P is very much committed to its Australian business and maintaining its Australian presence.

There is little more than a month left in which this stand-off can be resolved - the changes are to be effective from 1 January 2010.