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. Moodys put Korea on its watch list, while Standard & Poors lowered the outlook for the countrys sovereign rating from stable to negative. In October 1997, when Kia filed for bankruptcy protection, S&P downgraded Koreas sovereign rating to A- again just after it lowered the rating one notch to A+ from "AA-." As the countrys 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 Koreas fate. In late 1997, Moodys lowered the nations 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 Moodys staff visited Seoul several times for talks with top government officials and politicians each time, but upgrading the countrys 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 Streets influence on Koreas 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, Europes 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 (email@example.com)