Ratings agencies must be tightly supervised, says IMF

Sovereign credit ratings have inadvertently contributed to financial instability,according to the IM

Credit ratings agencies must be more tightly supervised as they can influence financial stability, says the IMF in its half-yearly Financial Stability Report to be released next week.

According to the BBC, ratings agencies have been foregrounded due to the downgrades they imposed on weakened sovereign balance sheets such as that of Greece and Ireland.

Sovereign credit ratings have inadvertently contributed to financial instability, said the IMF, noting that downgrades can result in destabilising "knock-on and spillover effects" in financial markets.

Ratings agencies have been found to exercise influence on fund managers on the question of which bonds to hold, with a downgrade pushing them to selling government bonds or refusing to buy newly issued ones. This causes a fall in the price of bonds and increases borrowing costs, thereby making further downgrades theoretically possible.

The IMF report particularly singled out Moody's, Fitch and Standard and Poor's as those agencies with global scope.

The report recommends that policymakers reduce dependence on credit ratings as much as possible.