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With regard to actually predicting default,13 the agencies' performance has been mixed. Reinhart (2002), using data from 1979-1999, found that credit ratings have systematically failed to anticipate currency crises and that nearly half of all defaults were linked with a currency crisis. Moreover, default did not occur in some cases due to IMF intervention and assistance. The report concluded that rating agencies were reactive, especially with respect to emerging markets. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=298262 Default, Currency Crises and Sovereign Credit Ratings

Carmen M. Reinhart University of Maryland - School of Public Affairs; National Bureau of Economic Research (NBER)

January 2002

NBER Working Paper No. W8738

1. Political risk - Stability, predictability and transparency of political institutions - Public and national security - Responsiveness to change and adapt 2. Income and Economic Structure - Degree economy is market-oriented - Extent of property rights - Per-Capita GDP 3. Economic Growth Prospects - Changes in standard of living - Income distribution 4. Fiscal Flexibility - Tax revenues, expenditures and past performance in balancing budgets - Methods of deficit financing and their inflationary impact - Growth friendly tax system and the ease of which it can be changed - Efficiency of expenditures 5. Government Debt Burden - Extent to which government can pay and manage its debt 6. Off-Budget and Contingent Liabilities - Size and health of non-financial public sector enterprises - Health of financial and banking system 7. Monetary Stability - Credit trends - Price behavior in past economic cycles - Level, currency and maturity of public sector debt - Money and credit expansion - Independence of central bank - Compatibility of exchange rate regime with monetary policy - The range and efficiency of monetary policy tools - Depth and breadth of capital markets 8. External Liquidity - Structure of merchandise trade, service, income and transfers - Vulnerability to changes in investor sentiment - Gross external financing as a percentage of official foreign exchange reserves 9. Private Sector Debt Burdens - Residents assets and liabilities 10. Public Sector Debt Burdens - Trends in public sector debt - Contingent liabilities - Foreign exchange reserves

Table 3: Moody’s Sovereign Categories 1. Economic Structure and Performance - GDP, inflation, population, GNP per capita, unemployment, imports and exports 2. Fiscal Indicators - Government revenues, expenditures, balance, debt all as percentage of GDP 3. External Payments and Debt - Exchange rate, labor costs, current account, foreign currency debt and debt service ratio 4. Monetary and Liquidity Factors - Short-term interest rates, domestic credit, M2/foreign exchange reserves, maturing debt/foreign exchange reserves, liabilities of banks/assets of banks

1. Enron was rated investment grade by the NRSRO's four days before bankruptcy;

1. The California utilities were rated "A-" two weeks before defaulting;

1. WorldCom was rated investment grade three months before filing for bankruptcy;

1. Global Crossing was rated investment grade in March 2002 and defaulted on loans in July 2002;

1. AT&T Canada was rated investment grade in early February 2002 and defaulted in September 2002; and

1. ABB was rated "A2" by Moody's as of March 14th 2002 and was rated "Ba2", negative watch as of October 31, 2002. Similarly, S&P rated ABB at "A+" as of March 14th, 2002 and "BBB-", negative watch as of November 5 th 2002.

S Failures

Enron November 2001 Orange County California, Mercury Finance, Pacific Gas & Electric, Enron, WorldCom, Delphi, General Motors and Ford.

FINANCIAL GATEKEEPERS: CAN THEY PROTECT INVESTORS?, Yasuyuki Fuchita, Robert E. Litan, eds., Brookings Institution Press and the Nomura Institute of Capital Markets Research, 2006 San Diego Legal Studies Paper No. 07-46