International rating agency S&P has been through a tough period. The company has taken sharp criticism of its part in the financial crisis, mainly over the rating of complex financial products that were awarded high ratings but collapsed when the crisis broke. S&P president Deven Sharma doesn't seek to evade responsibility. "We need to regain the market's confidence," he says in an interview with "Globes". "This crisis has obliged all bodies responsible for analysis and forecasts to undergo change, and we too have made a number of changes."
What has changed in your case?
Sharma: "First, we put an emphasis on transparency, and we are committed to acting more transparently. Secondly, we made changes to the rating method to suit market expectations better. So, for example, we give greater weight to stability, because we understand its importance to the market.
"We have raised the importance of corporate governance in the credit analysis process, since matters such as ownership structure can, in certain cases, affect a company's creditworthiness."
How do you intend to restore the market's confidence in the rating agencies?
"We are investing resources in educating investors about how to use a rating, and what its function is. There were investors who used our rating as a recommendation. It's important to understand that the rating is an estimate of the state of the company or the product, and not a recommendation. We are not responsible for the liquidity of the markets, their volatility, or asset pricing. When a decision to invest is made, it's necessary to look at other things besides the rating.
"In addition, to strengthen credibility we appointed a complaints commissioner, who deals with approaches from investors and others about potential conflicts of interest."
What do you say to the claim that, after the harsh criticism you have been subject to, you have become too conservative and stringent?
"I don't agree with that claim. We are doing what we have always done with determination. You have to remember that the economy has also undergone extreme change. Anyone who buys a B-rated product has to understand that, if there is an extreme change in the economy, the product's rating will be hit significantly. Many ratings fell because of the extreme change in the economy."
Sharma stresses that, as part of the lessons of the crisis, the ratings agencies won't award an AAA rating as easily as they did in the past. "We understood from the market that an AAA rating must be stable. Now, we will give a rating like that only in cases in which the chance of default is in a scenario of an extreme recession," he says.
Sharma was appointed to the post of president of S&P less than two years ago, just before the crisis broke out. He came to Israel for the International Organization of Securities Commissions (IOSCO) Annual Conference, organized by the Israel Securities Authority. Apart from participating in the conference, Sharma took advantage of the opportunity to meet senior Ministry of Finance officials, among them Commissioner of Capital Markets, Insurance and Savings Yadin Antebi and Ministry of Finance director-general Yarom Ariav. Despite official denials, it can be presumed that the subject of Israel's credit rating and its economic situation arose in the meetings.
Sharma refuses to comment on Israel's rating, which is currently A, and will only mention that "we met with Israel's policy makers to understand their goals and policies."
Fears have arisen recently over Israel's rating. While Sharma remains silent on the subject, S&P Maalot CEO Dorit Salingar perhaps provides a hopeful hint about the future of the rating when she says, "The problem of a worsening fiscal deficit isn't unique to Israel. In general, the rating agencies treat a short term breach of deficit limits with understanding, as long as long-term targets are maintained."
Sharma shares the cautious optimism heard lately about economic recovery. Nevertheless, he estimates that the global economy still faces several challenges. "If we look at the past few months, we see improvement in stock and credit markets. These are good signs. There are still challenges in the global economy, among other things the expected reduction in the level of the banks' leverage and higher fiscal deficits in various countries, which will cause economic pressures. Recovery will be slow and moderate, but we are certainly seeing a positive light," Sharma says today.
Published by Globes [online], Israel business news - www.globes.co.il - on June 11, 2009
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