Sovereign Credit Rating

In 1997, international confidence in Korea was shaken after cash-strapped Kia Motors’ credit crunch was prolonged in addition to a series of major corporate bankruptcies. Moody’s put Korea on its watch list, while Standard & Poor’s lowered the outlook for the country’s sovereign rating from “stable” to “negative.” In October 1997, when Kia filed for bankruptcy protection, S&P downgraded Korea’s sovereign rating to “A-“ again just after it lowered the rating one notch to “A+” from "AA-." As the country’s credit rating dropped, foreign investors fled the country in touching off a financial crisis.

The power of the U.S. credit rating agencies’ was big enough to determine Korea’s fate. In late 1997, Moody’s lowered the nation’s sovereign rating seven notches in less than a month. After the eventual bailout from the International Monetary Fund, the country struggled to recover its credit rating. In 1998, a group of Moody’s staff visited Seoul several times for talks with top government officials and politicians each time, but upgrading the country’s rating did not come easily. Korea recovered its pre-crisis sovereign rating in April this year, 13 years after the financial crisis erupted.

Arguments arose over Wall Street’s influence on Korea’s downgrades throughout the crisis, though hard to confirm. Such opinions were usually voiced by European financial institutions. Lately, the U.S. Senate is urging an evaluation of the credit rating agencies. Senator Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations, said the agencies receive high fees yet turned a blind eye to Wall Street influencing rating evaluations. He said such moral hazard contributed to the U.S. subprime crisis. American economist Paul Krugman, winner of the 2008 Nobel Prize in Economics, said financial crises result from corrupt systems, of which credit rating agencies are a major part.

When the ratings agencies downgraded the sovereign rating of Spain, Europe’s fourth-largest economy, following similar moves for Greece and Portugal, the European Commission, the European Union`s executive body, immediately protested the move. Some urged the setup of European credit rating agencies. IMF Managing Director Dominique Strauss-Kahn also questioned the credibility of the credit ratings agencies. The U.S. and the EU are drawing up bills for regulating such agencies. While determining how far the ratings decisions by the agencies can be trusted is difficult, they are certainly a threat and a harbinger of death to countries in economic predicaments.

Editorial Writer Park Yeong-kyun (parkyk@donga.com)