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Caught with their pants down?

Rating agencies have been strongly criticized for failing to spot the Asian crisis. Investment-grade bonds have been downgraded to junk status - but only after problems have appeared and without much warning. For the first time the agencies are having to justify themselves. Are they as good in Asia as they are in the US? Steven Irvine reports.

"An institution run by a bunch of bureaucrats who couldn't run a corner candy store is not necessarily a bad credit risk," ran one particularly good rebuff from a defensive Moody's executive in late 1997. It was not a vintage year for the credit-rating agencies in Asia.

There is no question that a re-rating of Asian credits was in order. But both Moody's Investors Service and Standard & Poor's (S&P) are open to criticism over the way events overtook them. Investors carp that as recently as September they bought $1.5 billion of Korea Development Bank bonds when the state-backed issuer was a highly rated A+/A1 - in other words a safe credit. Presumably, says one investor, the long-term ailments that dog the Korean economy today were just as bad in September. If the agencies had done their job, spotted them, and reflected them in their ratings a lot of international investors wouldn't have bought those KDB bonds - which are now rated BBB minus by S&P and Baa1 by Moody's which is junk.

For the trustees of normally conservative US and European funds, the recent ratings turmoil was a sobering experience. If you want to see a grown man cry ask him about Thailand's 7.75%

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