If you think there isn't enough pressure on European leaders to resolve the eurozone debt crisis, you're wrong. In a surprise move, the credit ratings agency Standard and Poor's (S&P) has put most of the zone on "credit watch". As a result, six countries with top AAA ratings - including Germany and France - face a 50 per cent chance of having their ratings downgraded.

The move could pose grave difficulties for the eurozone. Its rescue fund, the European Financial Stability Facility, relies on France and Germany's premium status to keep its own top rating. Downgrading these countries could aggravate the debt crisis by making it more expensive to bail out troubled countries. The lower the credit rating, the higher the interest that attaches to loans in order to attract investors.

Clearly S&P wields huge power in the financial markets. But what exactly are ratings agencies, and how do they operate?

S&P, one of the big three credit ratings agencies (along with Moody's and Fitch), is a New York-based financial services firm that rates the financial stability of a business or country. The checks it runs on firms, nations and financial products are comparable to the research a bank runs on you before giving you a credit card.

There is a long history behind the agencies' work. Poor's started life as a reference book and then a journal in 1860, moved into the ratings business in 1906, and merged with Standard Statistics in 1941. It followed in the footsteps of Moody's, which began rating US railroad companies around the turn of the century.

Markets continue to rely on these agencies as the only truly independent marker of creditworthiness. There is no opt-out clause: a country or company must obtain a rating before it can issue a bond or a loan. Despite this "independence", however, the agencies collect fees from the very companies that they rate, creating a conflict of interest.

The system was shown to be fundamentally flawed during the 2008 crash. Some agencies earned three times more for rating arcane securitisation transactions than for their usual remit of corporate bonds. The vast bulk of these transactions, whose unravelling triggered the collapse of the
world economy, were given the AAA rating.

Wrong call

In the aftermath of the financial crash, it appeared that ratings agencies were finally coming under close scrutiny from the regulators, but hopes for change have not been realised. The agencies not only failed to spot the crash, but exacerbated it by giving sub-prime mortgages the safest ratings possible, fuelling enthusiasm for these risky investments. Yet they continue to wield enormous influence over the markets and, indeed, over countries' fiscal policy.

Over the past six months, S&P's decision in August to lower the US rating to AA+ caused market turmoil, and in October a false statement that it had downgraded France caused French bond yields to surge. The French government was so angry that it threatened to ban the agencies from commenting on France.

There are moves under way in Europe to regulate the ratings agencies more tightly, reducing the power of the big three firms. But, for the time being, the markets - and some of the world's largest economies - remain at their mercy.