Last week the Caribbean Development Bank (CDB) was again downgraded by international rating agency Standard & Poor’s (S&P) from AA+ to AA and given a negative outlook but had its A-1 short-term foreign currency rating affirmed.
CDB president Dr Warren Smith sought to play down the rating by pointing out that, compared with other lending agencies, and given the fact that it was lending mainly to 18 Caribbean countries which were having difficulties, it was nothing to worry about unduly.
His response contrasted sharply with that from the Central Bank and Government following Barbados’ last rating from S&P. Dr Smith said the CDB had largely addressed the internal concerns identified in their May and June reviews.
However, a recent decision from Australia might give some comfort to those who have concerns about the rating agencies. The case would suggest that countries and/or investors who feel wronged may be able to seek redress for any “unfair” downgrade.
The Australian Federal Court recently ordered S&P and the issuing bank (the bank that arranged the derivative product in question) to pay AUD$30 million (BDS$60 million) in damages to several Australian local governments.
The claim concerned the AAA rating (their safest credit rating) given by S&P to two structured debt issues in 2006, which later lost almost all of their value. Though it is the first ruling on a rating agency’s liability for investor losses, it may signal a future trend for their liability in negligence.
The claim concerned the rating, sale and purchase of a complicated structured financial product known as a constant proportion debt obligation (CPDO). The issuing bank, through its dealings with S&P, had a good idea of how S&P would model the performance of the CPDO to assess the creditworthiness and the rating.
Thus the issuing bank modelled the CPDO so as to ensure that they achieved a rating of AAA. Due to a series of errors, omissions and unjustifiable assumptions, S&P rated the CPDO as AAA and authorized the issuing bank to disseminate that rating to potential investors.
The court ruled inter alia that S&P’s rating of AAA was misleading and deceptive and the publication of information and statements were false in material particulars.
Though the ratings are opinions, S&P has a duty of care to investors relying on them. S&P announced plans to appeal the decision but it means rating agencies may not be able to hide behind disclaimers to protect them from liability.
Nonetheless, these agencies’ opinions carry some considerable weight in financial circles, and it is foolhardy to believe that their recommendations could be treated with contempt and ignored.
