Credit Rating Agencies Role in Financial Crisis

1. Credit rating agencies present one of the key problems in reconfiguring the spherical pecuniary architecture. Why? What are the options? What is the most likely resolvent? * The rating agencies present one of the key problems because they were behind the rating of the interlocking CDOs as well as taking an active tallyt in creating these mortgage-related products which created conflict of interest. The ratings given to the CDO tranches did not effectively disclose the true recognition quality of the chthoniclying securities which contained a a good deal higher default probabilities. * Options * more regulations by SEC to control the issuer pays model. To correct the competition problem within the issuer pays model, the SEC could place limits on the competition that occurs among the rating agencies. (Acharya & Richardson, 2009) * An alternative mental synthesis () would be for the SEC to create a department that houses a centralise clearing platform for rating agencies . (Acharya & Richardson, 2009) * Another option is to deregulate the persistence and allow free-market competition forces to shape its further growth and development which could involve in players like Bloomberg that would offer bond rating as a value-added services to its clientele. most likely solution * Although it is a very Byzantine situation and it would require a series of regulative changes, a regulatory oversight agency that would closely monitor the rating agencies and act as an intermediary in matching the issuers with the rating agencies. 2. Greece is in trouble. Why? Fast-forward 5 years and describe the most likely outcome of the authentic problems and their consequences for global banking and financial markets. * Greece is in trouble because it has failed to keep under controls its ballooning debt and stack away a total national debt of over 113% of the countrys GDP.In April and May of this year Greece has to repay a total of $23 million of its maturing govern ment bonds which raised the question of whether it will be able to finance the debt at its current financial state. * It has come to light that Greece used a series of financial transactions facilitated by Goldman Sachs to make its financials appear much nicer to adhere to the EU requirements of the member countries having to chief(prenominal)tain the budget deficit under 3% of GDP. concerns virtually Greeces high level of debt led the three main international credit ratings agencies to downgrade Greek government bonds in January, so when Greece issued its bonds, it had offer them at much higher interest rates (five share higher than those offered on benchmark German bonds) in order to disembowel investors. (Fleeson) * Depending on how EU deals with the Greece problem, the Euro zone could become stronger in the outcome or it could face a moral hazard when more of the snarly EU countries (Portugal, Ireland, and Spain) encounter the same problem as Greece and will expect EU to bail them out. If Greece is allowed to default on its international debt it will put extort on the entire Euro zone and will make it more problematic for Portugal, Ireland, and Spain, who have ratios of debt to gross domestic product that are three quantify higher than the EU ceiling of three percent, to seize on in the near future. (Fleeson) * If EU backs Greece, it will be more easier for the country to borrow at favorable rates and it will ease the pressure from the speculators which were sporty against Greece and aggravating the problem even more. On a more irresponsible note, the fact that the euro has weakened during the past four months as a solution of the situation with Greece has the made the European goods relatively cheaper and export conditions more favorable. * Most likely outcome is that EU will eventually back Greece in some shape or form, once the member countries can insure on the measures, to keep it from defaulting and impose stricter economic rules on th e members to adhere to in order to create sounder economic environments. analysts say that supportive whistle (and even credit guarantees) will probably not be large to salvage Greeces finances and that ultimately the country is likely to contract a package of loans put together by other EU governments and the International Monetary Fund (IMF). (Fleeson) * As part of the deal world forged in Brussels, Germany and France are demanding that the eurozone rewrite its rule book about economic convergence, including sanctions against governments (such as Greeces) that deceive their EU partners about their real financial situation. (Maudave) * The emergence of changes of this sort, including effective measures of discipline against offending eurozone countries, the new fiscal discipline and beginning of collective economic governance among the eurozone countries, could be an important stride forward to the EUs global clout. Such progress toward economic coherence and credibility cou ld amount to progress on a par with the Lisbon treaty and, for the long run, a silver lining to the current economic hardship being inflicted on the EU economies. (Maudave) References Viral Acharya, Matthew Richardson. Restoring pecuniary Stability How to Repair a Failed system. New Jersey John Wiley & Sons, Inc. , 2009. gull Tony Spadaccia. U. S. is Resembling Greeces Economic Decline. The Breeze, March 18, 2010. Web. Sat. 20 March, 2010 http//breezejmu. org/2010/03/18/us-is-resembling-greeces-economic-decline/ Will Fleeson. autonomous Debt Liable to Overwhelm System in the EUs atomic number 23 PIIGS. The European Institute, February 2010. Web. Fri. 2 March, 2010 Will Fleeson. Euro Zone Acts to Dodge Greeces Bullet provided More to Come From PIIGS? The European Institute, February 2010. Web. Fri. 12 March, 2010 http//www. europeaninstitute. org/February-2010/euro-zone-may-dodge-the-bullet-from-greece. html Basil Maudave. EU Bail-Out For Greece? Time Has Come, Reportedly , To Do It With Conditions. The European Institute, March 2010. Web. Fri. 12 March, 2010 Arthur E. Wilmarth, Jr. imperative Systemic Risk in an ERA of Financial Consolidation.