How and why credit rating agencies missed the Eurozone debt crisis

Abstract

In March 1918, Moody’s became the first firm to assign credit ratings to foreign government bonds. John Moody, who had a strong influence on his firm’s rating policy, was aware that World War I would have immeasurable economic and financial consequences. The USA was to become the creditor nation of the world—overtaking Great Britain and France, which would henceforth have to cope with a heavy public debt burden.1 In 1918, Moody’s rated only 10 countries, accounting for 189 foreign government bonds. By 1929, its coverage had expanded; the credit rating agency (CRA) was rating 50 countries and more than 900 sovereign bonds. At the same time, three competitors appeared: Fitch, Standard Statistics and Poor’s.2 The meaning of a sovereign credit rating has not changed since the interwar years: it is an opinion on the relative ability of a government to...