【政经一日闻】信用评级的力量

The political infighting in Washington took on global importance Thursday when the ratings agency Standard & Poor's released a report saying it would downgrade the world's largest economy's credit rating if a deal to raise its debt ceiling is not agreed on soon.

This comes after similar warnings from Moody's and Finch -- who, along with S&P, are known as the "Big Three" global credit ratings agencies.

Meanwhile, European Union markets reeled this week after Moody's recent credit downgrades of Ireland, Greece and Portugal -- heightening fears that the EU debt crisis will hit the larger economies of Italy and Spain.

Government officials on both sides of the Atlantic have railed against the agencies. So how did the global economy become so dependent on the opinions of three companies?
Who are the credit rating agencies?

The "big three" are Standard's & Poor's, Moody's Investor Services and Fitch Ratings. All originated in the United States, although Fitch has dual headquarters in New York and London.

Before you can get a credit card, banks run a credit check on you. Similarly, the ratings agencies run credit checks on companies, countries and financial products.

Countries are rated on a sliding scale: the U.S., for example, has a top rating (AAA) which allows it to borrow cash at cheap interest rates. The lower the rating grade, however, the higher interest payments a nation must pay to attract investors to buy its bonds. Anything that slips to junk status -- as Ireland, Portugal and Greek government bonds are rated -- is considered a "highly speculative" investment. Furthermore, the pool of eligible investors is reduced -- many institutional investors, such as government pension funds, are forbidden to invest in junk-rated bonds.

Investors across the world look to credit rating agencies to judge where to place their bets in the market. For governments, the ratings agencies have a lot of power over the popularity of bonds: cash given to governments by investors that, over time, will pay a return on the original investment -- unless the government defaults. The downgrade of Ireland this week signaled Moody's belief that Ireland has a higher likelihood to default on investments. And global investors have little appetite to invest in those bonds.

The decisions of the "Big Three" catalyze market moves in often unpredictable ways, creating a strong ripple effect. In the wake of the Greece downgrade last year, for example, investors across the globe started rethinking investment in other governments' bonds and began selling off more risky investments -- throwing the EU into crisis and depressing the value of the euro. There was a similar psychological ripple through the markets this week after Moody's recent downgrades of Ireland and Portugal -- it put the spurs to Italian lawmakers to pass deep cuts in government spending on Thursday and turning up the heat on Washington lawmakers to extend the debt ceiling.