Do not be too quick to accuse us of missing the signs of Asia's financial turmoil, Moody's Investors Service says.
In a 45-page brief entitled 'Moody's Rating Record in the East Asian Financial Crisis', the international rating agency said it posted warnings before the crisis broke and argued it had a better record of doing so than its competitors.
Moody's said it went into the crisis with the lowest ratings on the countries involved, had very weak bank financial strength ratings on most banks in those countries and gave clear indications of the problems they faced, well before anyone else and well before the market reaction.
The brief is a response to criticism that ratings agencies did no better than other investment commentators in foreseeing the crisis, despite their claimed expertise in credit rating. The brief also addresses the belief that agencies may be prolonging the crisis by continuing to downgrade ratings on Asian firms.
Moody's cites its own earlier reports as evidence it already began to warn of the crisis in Thailand in March, 1996, that it alerted investors to short-term debt problems in Korea in May, 1996, described Indonesian banks as fragile in September, 1996, while having a low rating on the country's foreign currency bonds since March 1994.
Moody's accepts a measure of blame.
'Nevertheless, certain criticisms are fair. For instance, perhaps Moody's should have been even more forceful earlier on and downgraded sovereign ratings while there was only a small risk of a liquidity crisis.
'However, should Moody's have taken Thailand's and/or Korea's ratings to levels perhaps six notches below the other agencies in 1996? 'What would have been the market reaction to such drastic moves at a time when market sentiment was that Moody's ratings were too low? Would the media and Wall Street have applauded such actions as foresighted and prudent? 'We doubt it. In any case, we believe it is the proper role of a rating agency to attempt to be as timely as possible in its rating actions but never to be pre-emptive for the sake of appearances nor to hold back a rating change for fear of market reaction.' The brief criticises contrary views that it had been too slow in downgrading sovereign credits, and had since become too rapid in doing so.
'These statements are often made by the same people who protested our initial East Asian rating actions as excessive while today demand that we should have reacted more aggressively.' The brief continues: 'More broadly, we are re-examining why the fundamental strengths of many East Asian nations and their basic financial ability to respond to crisis did not translate into a successful remedy to the situation, as their previously responsible economic management suggested would happen.
'In particular, we are focusing on the ability and willingness of government leaders to take appropriate steps amid an attack on their currencies as well as the adequacy, timeliness and scope of potential outside support of the IMF or nations such as the US and Japan.' The brief outlines five innovations which would be important in the 'new ratings paradigm'.
These innovations included greater emphasis on the risks of short-term debt, and the identity and creditworthiness of a country's short-term borrowers.
A greater appreciation of the risks posed by a weak banking system on a developing country was an important factor, as was the identity and likely behaviour of foreign short-term creditors.
A fifth innovation suggested was increased sensitivity to the risk that a financial crisis could be passed on to another country.