To be published as HC 1866-iii

House of commons



Treasury Committee

Credit rating agencies

Tuesday 24 April 2012

Moritz Kraemer, David Riley and Alastair Wilson

Evidence heard in Public Questions 270 - 379



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Oral Evidence

Taken before the Treasury Committee

on Tuesday 24 April 2012

Members present:

Mr Andrew Tyrie (Chair)

Michael Fallon

Andrea Leadsom

Mr Pat McFadden

Mr George Mudie

Jesse Norman

Mr David Ruffley


Examination of Witnesses

Witnesses: Moritz Kraemer, Managing Director and Head of the Sovereign Ratings Group for Europe, Middle East Africa, Standards & Poor’s, David Riley, Managing Director, Sovereign and Supranational Ratings, Fitch Ratings, and Alastair Wilson, Chief Credit Officer, Moody’s, gave evidence.

Q270 Chair: Thank you very much for coming to see us this morning. This is the second hearing we have held on the risk rating agencies. Can I begin, Mr Kraemer, with the decisions that have been taken on the US downgrade? Does S&P accept that it made a $2 trillion mistake in assessing the size of the US budget deficit reduction plan?

Moritz Kraemer: Good morning. The US downgrade in August last year was based on three main factors. The first one was the high level of debt-

Chair: Before we get into all that, I am just asking you a very simple-

Moritz Kraemer: I cannot do that. The answer is no.

Q271 Chair: You do not accept it?

Moritz Kraemer: I do not accept it. I was about to explain what happened.

Q272 Chair: What don’t you accept of what was set out by John Bellows, the Assistant Secretary for Economic Policy, in his article on 6 August 2011? What is it that you do not accept about the $2 trillion? I am not asking you about whether it was right to downgrade or not, first of all. I am just asking you about this $2 trillion alleged error.

Moritz Kraemer: The discussion with the Treasury Department in Washington was about which of the scenarios that were published by the Congressional Budget Office, which is a non-partisan institution, should be underlying the analysis. Originally, the S&P team was of the assumption or was following the alternative fiscal scenario of the CBO, which, in terms of expenditure trajectory, did foresee a growth in spending in line broadly with nominal GDP.

Following discussions with the Treasury, as there are habitual interactive relationships with the issuer, S&P agreed with the Treasury that the baseline scenario of the CBO would be the appropriate scenario to use. Now, this is an entirely normal process of interaction and discussion about future policy measures taken by a sovereign Government. The $2 trillion is the following number. The $2 trillion is the difference in the net debt ratio in 2021, depending on which scenario you use. Under the alternative scenario, which we had initially pursued, the debt ratio in 2021, would have come up at US$22 trillion-I am using round numbers, $22.1 trillion-which is $2 trillion higher than under the baseline scenario, which is $20 trillion. So the baseline scenario is the one that the committee looked at. That was presented to the Credit Committee after the discussions with the Treasury and it was on that basis that the decision in August was taken.

Q273 Chair: I am just trying to get to the heart of it. He is alleging, and the US Government is alleging, that a serious mistake was made and you are saying they are the people who have made the mistake?

Moritz Kraemer: No, there was no mistake made by either side. They are different scenarios. These are measures about the future. You have to have an analytical debate on what is the likely strategy of fiscal consolidation the Government might take. These are all CBO scenarios that we use. This is not an S&P scenario. The question was merely, which of the various CBO scenarios that have been published should be underlying the rating assessment. Now, we did agree with the Treasury that it should be the baseline scenario, which would lead to $20 billion rather than $22 billion. So there was no mistake on their side and there was no mistake on our side.

Q274 Chair: So he has just made a mistake writing an article saying there was a mistake. I will read you what he says, "Standard & Poor’s presented a judgment about the credit rating of the US that was based on a $2 trillion mistake. After Treasury pointed out this error, a basic math error of significant consequence, S&P still chose to proceed with their flawed judgment." He thinks you have made a mistake.

Moritz Kraemer: What I just represented to you is the-

Q275 Chair: You are saying there is no mistake on either side. So he must have made a mistake in thinking you had made a mistake.

Moritz Kraemer: I can only describe to you the turn of events from the time back then and the turn of events are as I described. This is a normal discussion that you have with Governments when you meet the Government officials to discuss what is the likely turn of policy choices that will be taken. Clearly, in the future, you can have various scenarios. Happily there were various scenarios on the table published by the CBO and it is a natural process to discuss which is the most likely scenario that should be our base case when we assess the credit risk of the United States in this case and the Treasury and S&P were in agreement that the one that we used is the proper one.

Q276 Chair: You did not change the scenario after you heard about the $2 trillion?

Moritz Kraemer: The scenarios there are in the public domain. We knew about the various scenarios beforehand.

Q277 Chair: But it did not change the base case scenario after you heard about the $2 trillion?

Moritz Kraemer: No, as I said earlier, initially-

Chair: Sorry, can I just clarify; did you change the base case scenario after you heard about the $2 trillion?

Moritz Kraemer: No, we did not hear about the $2 trillion by the Treasury because this was the outflow of the published scenarios by the CBO. What happened in the discussion with the Treasury is that the Treasury did make a credible statement and a credible stance that the base case scenario of the CBO is the proper one to adopt and we agreed to that. Although originally we were planning to use the alternative scenario, this is the value added of an interactive relationship that you hear the view of the Government and we thought they made a credible statement on that.

Q278 Chair: The US Treasury will be listening to this and they can submit evidence, if they choose, to us on that point and to Congress. Was the Rating Committee reconvened to discuss this $2 trillion issue?

Moritz Kraemer: The Rating Committee discussed the various scenarios. Under both scenarios that we discussed here, the outcome, according to our published criteria-

Q279 Chair: I am sorry to keep getting back to the question, but there is a sequence of events here. When the US Treasury pointed out what they considered to be, and they still seem to consider to be, this $2 trillion mistake, this was still prior to your decision to issue the downgrade, was it not?

Moritz Kraemer: The discussion between S&P and the Treasury was prior to the Credit Committee, they decided to downgrade-

Q280 Chair: That is what I have just asked you and the answer to that is yes. When that discussion took place and you learned about their view of this $2 trillion mistake, did you reconvene the Credit Committee?

Moritz Kraemer: Again, I refute the name "mistake" in this context.

Chair: I said their "their view".

Moritz Kraemer: "Their view" yes, but I just want to make clear that it is not our view. We did convene a committee that discussed the mutually agreed scenario, which is the CBO base case scenario leading to a $20.1 trillion net debt in 2021. So the answer is yes.

Q281 Chair: Since the downgrade, the yield on US Government bonds has fallen by more than a fifth. How does that square with your judgment?

Moritz Kraemer: It does square with the judgment. What we have to understand is that the yields and the capital market developments depend on many factors, one of them being an opinion issued by a rating agency. My interpretation of market development is the following. There has been, not only in the US but more generally, globally, investor flight to quality and safe papers and there are a number of those available, one of them being the US Treasury bond.

Q282 Chair: So they have all moved broadly together, I expect, have they not? Germany being another example of a beneficiary of a flight to quality, along with the US and the UK?

Moritz Kraemer: Correct.

Q283 Chair: So you have a number of countries that you have not downgraded sitting there that have benefited from this flight to quality, but one you have downgraded has also benefited. Why do you think that might be?

Moritz Kraemer: First of all we need to keep things in perspective. The sovereign crediting rating of the United States is AA plus, which is signalling our belief that there is an extremely small probability of default.

Q284 Chair: But a higher probability than there was before?

Moritz Kraemer: A marginally higher probability as before, correct. I think the flight to quality phenomenon that we are observing is something that-you need to look at the various alternative assets that are at the disposal of the investors and the investors take the view that this is a safe place to put the money. You need to remember that ratings and market yields do correlate over a very long term, over the whole spectrum of the ratings, but it is not the case, although it is sometimes perceived as such, that, if a rating agency lowers or raises the rating, automatically the refinancing cost of that particular issuer would change.

Q285 Chair: Do you believe that the US capacity and willingness to repay is lower than that of, say, Finland?

Moritz Kraemer: I do.

Q286 Chair: You take into account there that Finland has huge exposures-a small country, not least to Russia but to very powerful regional factors-and that the country is heavily exposed to one industry, unlike the huge diversification of the United States, and still you come to that view?

Moritz Kraemer: We rate sovereigns and we rate all 127 sovereigns that we rate according to a published and transparent methodology. One of the key elements in the methodology is the political environment and it also has to do with public finances. On both accounts, if you want to compare the US with Finland, you will notice two things. First of all, that the debt ratio in the US is much higher. You will find that the debt trajectory is more adverse but, most importantly-it has been our finding at least and people may come to different conclusions on that-we felt that the governance challenges that the US political system is facing in generating a coherent strategy of getting the public finance challenge under control are more pronounced than they are in Finland. Specifically last summer, the US Government got extremely close to a real liquidity crisis because the Washington establishment could not agree on the way forward that would have been required to raise the debt ceiling.

Q287 Chair: Would you think that there is any truth at all in a point put to us by a sovereign risk expert, many years’ experience in the field at a high level, who has given us advice, "Like journalists looking for a splash, each agency will wish to be the first to move and hit the headlines with new developments", suggesting a rating should be reviewed or changed rather than be seen to follow competitors, "Sovereign ratings generate a lot of publicity for the agencies"; in other words, this is partly a marketing operation. Do you think there is any truth at all in that?

Moritz Kraemer: No, I think there is no truth at all. We do apply criteria to all the sovereigns and we do assess all the sovereigns according to this criteria, which by the way has generated a very satisfactory result in terms of the probabilities of default and the ranking of creditworthiness of sovereigns. It is our view that our duty to the marketplace consists of assessing, in a timely way, the credit characteristics of various sovereigns and if we believe that they have changed we consider it is our duty to inform the general public of this changed opinion as soon as possible and that is exactly what happened in this case and what happens in all other cases.

Q288 Andrea Leadsom: Mr Wilson, does Moody’s think that Standard & Poor’s was right to downgrade the American credit rating?

Alastair Wilson: Our rating differs from Standard & Poor’s, so our judgment is marginally different from theirs.

Q289 Andrea Leadsom: Do you share their concern that the United States might in fact be marginally less able and willing to pay its debts than either the UK or Finland? You have the US on negative watch, don’t you, at present?

Alastair Wilson: We do, yes. The US and the UK ratings are the same, implying the same broad view of the probability of default and the loss in the event of a default. Finland’s AAA rating remains stable for now.

Q290 Andrea Leadsom: With your negative watch on the US, you consider that the US could become more likely to default than Finland? Is that the implication of that?

Alastair Wilson: The implication of a negative watch is that the downside risks to a particular rating there will have become marginally higher.

Q291 Andrea Leadsom: Do you think it is plausible and credible that the US might have the desire not to repay its debts or the inability to repay its debts? Is that what your thinking is in Moody’s?

Alastair Wilson: I think it is important always to bear in mind that these very high rating levels, particularly at AAA, whatever the outlook, represent a view that there is a very strong willingness and ability to repay debts. So the negative outlook on the AAA does not reflect a view that there is significant risk of a lack of willingness or capacity.

Q292 Andrea Leadsom: Mr Riley, do you think that it is reasonable for a ratings agency to effectively hold a Government to ransom, saying unless they do something about their debt ceiling then they will lose their AAA status? Is that a reasonable way for a credit rating agency to behave?

David Riley: I do not think it is reasonable for a credit rating agency to, as you suggest, hold a Government to ransom. I think it is reasonable for a credit rating agency to express an opinion as to what might influence the credit rating and if that is a failure to reach agreement on raising the debt ceiling, which could result potentially in a missed payment on a debt security, it would be remiss, frankly, of a rating agency not to express an opinion as to the likelihood of such an event and what that might imply.

Q293 Andrea Leadsom: To what extent should ratings agencies take into account the public nature of sovereign debt ratings at such a very sensitive time in the immediate aftermath of a global financial crisis? What kind of public duty do they have to try and preserve credibility in sovereigns?

David Riley: I think it is incumbent upon all of us, including the rating agencies, to do the role that we play in terms of each of the participants within the market. In the case of the rating agencies, our role is to provide a third party independent assessment of relative credit worthiness, including of national Governments. That is what we say we do. That is what we seek to do, according to our published criteria. In terms of issues about post-crisis or during the global financial crisis or the current crisis within the eurozone and financial market volatility, I think where we can help address that is not by pretending those issues are not there but to try to address them in terms of our ratings in a very timely but also in a very transparent manner. I think that is a reasonable thing for us to do.

Q294 Andrea Leadsom: Do you worry that ratings agencies all move in the same direction at the same time? Can you give us any examples of where you all completely disagree and have rated an entity completely differently? We have heard from previous witnesses that the idea of seven different credit ratings agencies is that you are all completely independent and would come to separate conclusions and yet in the case of the US market we have clearly seen that the entire market disagrees with S&P’s downgrade. So that does suggest that S&P, Fitch and Moody’s are all wrong to be so negative about the US ability and willingness to repay or that you are all guilty of group think and the market is working in the opposite direction. Can you give us an example of where you all completely disagree and have rated something completely differently?

David Riley: In the sovereign space?

Andrea Leadsom: It does not matter, in any space. Can you think of anything where you have all completely disagreed?

David Riley: It depends on the definition of "completely disagreed". We have different ratings. I would say we do have a different rating on the US relative to S&P.

Q295 Andrea Leadsom: Let me be specific. Do you have an entity that you are on credit watch to upgrade where another agency has it on credit watch to downgrade, for example, where you are setting the direction in completely opposite ways?

David Riley: I would have to check but, if my memory is correct, I think we had moved, for example, to a negative outlook on South Africa and I think during that time Moody’s may have taken a positive rating action. There certainly have been instances where each of the rating agencies have maintained different ratings during the course of time and have taken different rating actions. I think it is relatively rare for each of the three major rating agencies represented here to be moving in opposite directions and I think that is because in the fundamentals of our credit analysis there is sufficient overlap-they do differ, but there is sufficient overlap-such that our rating opinions are likely to be influenced by some common factors. I do not think that implies group think and I do not think that implies that each is following the other. It is that there are some common factors that influence the creditworthiness of sovereign Governments.

Q296 Andrea Leadsom: So that might then question what the point is of having so many credit ratings agencies, all commercial companies all charging significant sums of money and all drawing the same conclusions, because what you are saying is that the results are obvious, so there is no need to draw different conclusions?

David Riley: I do not think you can infer that from the response that I have given.

Q297 Andrea Leadsom: What is the value of having the three of you there if you all agree bar, at the margins, very occasionally? Neither you nor Mr Wilson are making an impassioned defence of the US economy and the fact that S&P were mad to downgrade them. Why are you not making that impassioned defence?

David Riley: You have asked us to make a defence of our particular rating, so it is not for me to speak to the rating of another agency.

Q298 Andrea Leadsom: I have asked Mr Wilson if he thinks S&P were right to downgrade. He says that they just do not agree. What is your view? Was S&P right to downgrade the US?

David Riley: We do not share S&P’s judgment both in terms of the commitment under the Budget Control Act in terms of deficit reduction and in terms of the ability of the US to sustain a higher level of debt than a number of other peer sovereigns because of the role of the dollar and the size and diversity of the US economy. We do have a negative outlook, however, on the US because, in the absence of agreeing on a credible deficit reduction plan, at some point in the future even the US will have a debt burden that is no longer consistent with it being AAA.

Q299 Mr McFadden: I would like to ask you about the UK, if I could begin with you, Mr Wilson. The UK enjoys a AAA rating at the moment. Moody’s have said that that AAA rating is accompanied with a negative outlook. Can you explain the reasoning for that?

Alastair Wilson: Yes, the negative outlook reflects the challenges that we believe the Government will face in achieving its debt consolidation objectives as a consequence of the macroeconomic environment both in the UK and elsewhere in which it is operating, in which the UK’s economy is sitting, and as a consequence of the potential for further shocks to emanate from the euro area as a consequence of the debt crisis.

Q300 Mr McFadden: If I pressed you and asked you about the key risks to the UK’s AAA rating status, would you say they were more the external ones of exposure to the problems in the eurozone or the trajectory of fiscal policy?

Alastair Wilson: I think there is a first step and a second step. Our view is that, in the absence of further macroeconomic shocks, the debt trajectory will be restored and the debt burden will become sustainable as a consequence of consolidation plans. The threats to the plans are in the macroeconomic arena and those threats are both as a consequence of the UK’s domestic macro environment and as a consequence of the situation in the euro area. We have not sought to try to weight those two broad underlying threats to the debt consolidation trajectory.

Q301 Mr McFadden: Mr Kraemer, just going back to what the Chairman asked you about the US experience, do you accept that you and the markets reached very different verdicts about the US given that, after your downgrading, bond yields fell by a fifth?

Moritz Kraemer: No, I think the markets and the credit rating agencies, almost by definition, look at different things. We look at the long-term fundamental strengths and weaknesses of an issuer, whereas market participants will look at the profitability of being in certain instruments at a shorter period of time. I would think that there are many examples of that, where rating action is not being followed immediately by similar yield changes. We do not have to go as far as the United States. You can see many examples of that happening in Europe, for example, where at Standard & Poor’s we lowered the ratings of Greece as early as 2004 and still the market bonanza went on for another three years before the markets took a more negative view as well.

I think this is quite unsurprising and I do not think it is a judgment on whether the fundamental analysis of a rating agency is right or wrong. I would express some surprise that there is the perception that the rating agencies always sing from the same hymn sheet because we have been discussing two credits right now, which is the US and the UK, where the three rating agencies you did invite today have come to different conclusions. I think the rating is certainly a point of observation that market participants take into account but, first of all, the ratings do not always agree and, secondly, there are many other factors that investors take into account.

I would not agree that we should, as a rating agency, try to replicate what the market is doing and trying to have a rank ordering of ratings according to yields, not least because this would undermine the stability of ratings because if you analyse the yield developments you will see that they are much more volatile and almost caustic at times compared to ratings which are much more stable over time and, therefore, give a more longer-term benchmark of credit risk than what markets are doing.

Q302 Mr McFadden: Mr Riley, Mr Kraemer has just told us that ratings are one thing and market verdicts are another. Which is the more important?

David Riley: I think the more important is the judgment that is made by the market in terms of afterwards the investors or potential investors who are choosing to lend to an entity or to a national Government or choosing not to extend borrowing and the terms in which that borrowing is extended. In many respects I do think that the role of the rating agencies, to be frank, is overstated, partly because one of the strengths-also, one could argue, one of the weaknesses-of the rating system is its simplicity. We have a simple grading scale, which obviously you are aware of, and so, if there is a positive or negative rating action, it is something that the media can report on very easily. But if a particular investor is taking a position in credit default, swap markets or selling UK gilts to buy German bunds or vice versa, that is something that is quite hard to communicate and is not as transparent as the judgments being made by the rating agencies. First and foremost, it is investors in the market who are deciding, not the rating agencies.

Q303 Mr McFadden: This is interesting. There is a huge political sensitivity around these ratings in the UK, the US and other countries and you are here from the rating agencies basically telling us, "It is not that important. It is what the markets say that matters", in which case, why do people pay so much attention to your verdict?

David Riley: You asked me the question, "Who is the most important", and I gave you the response to that. Do the rating agencies have an influence and a role? I think they do in terms of providing information to investors and input into their investment decisions. When investors are looking at a range of investment opportunities, particularly international investors, they are looking at the UK or they might be looking at Canada, Sweden, Germany or the US. The ratings, which are providing a relative guide to credit quality along with the supporting research, are one input into their investment decision.

Q304 Mr McFadden: Would you agree with this verdict from Sir Mervyn King? He is referring to this negative outlook action taken by popular ratings agencies and he said, "Now, what we have seen is that the action the ratings agencies took recently had no impact on the yield people in the market were willing to lend to the UK Government. What matters are the views of people in the market, not the view of the ratings agencies."

David Riley: As I say, we are, broadly perhaps, in agreement, speaking for myself on behalf of Fitch, that the ratings are an input into the investment decisions. We are not making recommendations in terms of buying or selling nor are we obviously conducting such operations. Does that mean that the ratings are irrelevant? If that is the question that you are asking then I think there is a lot of academic research and research conducted, for example, by the International Monetary Fund that demonstrate that, over the longer term, sovereign ratings in particular have provided a good relative indicator and that there is information content in rating actions taken by the rating agencies, and the market, over the longer term, does, correcting for these other factors which influence their decision, take into account what the rating agencies are saying.

Q305 Michael Fallon: Mr Riley, you have looked hard at the UK public finances. What kind of credit rating would an independent Scotland attract?

David Riley: Given the controversy around our ratings of sovereigns that do currently exist, I am very reluctant to speculate on sovereign nations that currently do not exist. We do not know the arrangements under which a potentially independent Scotland would come into existence and so I don’t think I can provide any real value in speculating as to what the rating may or may not be at that future point in time.

Q306 Michael Fallon: But if we assume, say, a pro rata 9% to 10% share of GDP on a bank debt and so on, what would the rating be, if it were an absolutely straightforward mathematical division?

David Riley: As you are aware, there is a lot of other issues associated with the governance of a potentially newly independent Scotland. So it would not just be the division of the liabilities and assets of the United Kingdom. Obviously the treatment of the oil receipts; what would be the monetary arrangements of an independent Scotland; what would be the financial sector and banking supervisory arrangements. There are a huge number of factors that would influence what would be the rating. I genuinely do not think it is appropriate or providing any value to speculate as to what that rating would be. There are so many uncertainties.

Q307 Michael Fallon: Is it possible for a country that does not have any history in the public finance markets to have a top AAA rating; a sovereign without any history?

David Riley: History and track records can be important in terms of building credibility. In fact, in our methodology and in our rating model, for example, we have an explicit variable for payment records. You get the benefit for having a clean payment record and your rating is affected if you have a history of adverse payments.

Q308 Michael Fallon: Can we deduce from that that it would be pretty hard for Scotland on day one to get anything near a AAA rating?

David Riley: With all due respect, I think you are trying to get me to make a pronouncement about a sovereign that currently does not exist and that I do not have the information to make the judgment.

Q309 Michael Fallon: You must have done this for other new sovereigns that have emerged from Eastern Europe. This must have happened before. You must have done it for Montenegro and Croatia and so on. So how would it work with Scotland?

David Riley: We would go through the same process of analysing the information and data that was available-I mean Scotland does not even have a true set of national accounts at this point in time-and obviously talk to the policy authorities and then assign a rating. I am not aware, at least in terms of Fitch, and obviously others can comment if they are aware of a different circumstance, whereby a newly independent sovereign emerging in Central and Eastern Europe, emerging from the end of the Cold War, has been assigned a AAA rating. But the transition of Scotland from the United Kingdom, I would suggest, would be fairly fundamentally different from the transition of some Eastern European countries, from essentially the former Soviet Empire.

Q310 Michael Fallon: I just want to know how likely it is that Scotland would attract a AAA rating on day one?

David Riley: I think I have answered the question.

Q311 Michael Fallon: Can Mr Kraemer help on that?

Moritz Kraemer: I have nothing to say to that and we have not said anything about this. I would take a similar line as Mr Riley. If you look at our methodology you will see what are the factors that we analyse when concluding at a sovereign rating. None of these factors are known. So I think it would be irresponsible for me to speculate here or in any other forum on what independent Scotland’s rating might look like.

Q312 Michael Fallon: Mr Wilson, can you be sure that Scotland would have a AAA rating on day one?

Alastair Wilson: Again, it is a highly hypothetical situation and any answer I gave would be highly speculative and misleading.

Q313 Michael Fallon: Have you given AAA ratings to any other newly-emerged nation?

Alastair Wilson: I don’t know the answer to that, I am afraid.

David Riley: As I suggested, not that I am aware of. I am fairly certain that has not been the case.

Q314 Michael Fallon: It has not been the case?

David Riley: It has not been the case with respect to Fitch.

Q315 Michael Fallon: That some newly lodged sovereign nation gets a AAA on day one?

David Riley: That is correct. I am not aware of any situation where we have assigned a AAA rating to a newly-independent sovereign nation.

Q316 Jesse Norman: Mr Wilson, I see that you support some of the view that has been taken. In fact, all three, in a way, support the view that has been taken about the US. None of you is prepared to take a view on Scotland. Why aren’t you competing with each other?

Alastair Wilson: Our role is to offer opinions on credit standing. The way Moody’s is structured is to draw a very clear divide between commercial parts of the organisation and the rating parts of the organisation. My role is within the credit policy area of the rating part of the organisation. We focus on ratings. We focus on expressing opinions on credit standing.

Q317 Jesse Norman: Has the euro crisis prompted you to review the relative importance of the factors in your ratings when you rate sovereigns?

Alastair Wilson: The euro crisis has-

Jesse Norman: Has it caused you to rethink the process of how you rate sovereigns?

Alastair Wilson: No, it has not. We apply the same methodology now as we have applied for the last 3½ years, which takes into account economic factors, institutional factors, Government financial factors and the potential for event risks to emerge. It is those four factors that we have applied consistently in determining ratings throughout the crisis.

Q318 Jesse Norman: Let us run through the four factors again. The potential for event risk and the other three?

Alastair Wilson: The first is the economic environment, macroeconomic strength. The second is institutional strength. The third is the Government’s financial strength, the balance sheet. The fourth is event risk.

Q319 Jesse Norman: So why did you not predict, for example, the situation in Iceland? Iceland had a notoriously rickety banking system. You downgraded it three times within a year.

Alastair Wilson: The financial crisis has brought many lessons for a host of commentators, including rating agencies, as has the sovereign crisis. One of the things that we have observed that we had not observed before was the propensity for markets to act very quickly for market consensus, confidence to change very quickly, and that was certainly a factor in the loss of creditworthiness-

Q320 Jesse Norman: You did not see that factor when you made the assessment?

Alastair Wilson: Certainly we did not anticipate the speed with which the markets could lose confidence in Iceland’s banking system, yes.

Q321 Jesse Norman: Let me give you a factor you might want to consider in your sovereign basis in the euro crisis, which is the risk that the stronger countries are going to be used to bail out the weaker ones. Do you consider that?

Alastair Wilson: Yes, we do.

Q322 Jesse Norman: In the political category that you have?

Alastair Wilson: No, it is something that we would factor into our assessment of Government’s financial strength, the potential for contingent liabilities to emerge.

Q323 Jesse Norman: Do you think the situation in France is now looking weaker as a result? You have a Government that is potentially prepared to turn its back on austerity, that is going to be tied to assisting countries that are still very weak in a flagging monetary context.

Alastair Wilson: What we have said about France is that clearly we will need to stand back and understand the objectives of any incoming Government once it is in place. But on the basis of what we have seen so far, the broad objectives of the main political parties seem consistent with the debt consolidation plans that are already in place.

Q324 Jesse Norman: Other things being equal, do you think countries that have their own currency should have higher sovereign ratings than countries that do not?

Alastair Wilson: The ability to have independent domestic institutions is certainly a strength. It is a strength that we recognise in the UK’s rating.

Q325 Jesse Norman: The ability to create a competitive devaluation is a strength. We are seeing this in the UK at the moment.

Alastair Wilson: It is certainly a factor that can boost economic growth, which is supportive.

Q326 Jesse Norman: Other things being equal, a national currency should promote a higher sovereign rating? Everything else is equal, so it has to be-

Alastair Wilson: The methodology has to take in a very wide range of factors.

Q327 Jesse Norman: But other things being equal, from what you said, domestic institutions and the ability to deflate your currency, that is a value. You are saying that is a consequence of your view for sovereign rating.

Alastair Wilson: The existence of strong institutions that are able to support Government policy is certainly a positive factor.

Q328 Jesse Norman: Okay. I cannot get you to say it, but it is a consequence of the words you have used. Why is it, do you think, given some of the warm words that you have had recently from the IMF, that people feel so differently about the value of sovereign ratings? What is the explanation for that?

Alastair Wilson: I am not sure I understand the question.

Q329 Jesse Norman: We have had some IMF testimony suggesting that ratings have performed reasonably well during the crisis. The European Commission has been very critical of ratings during the crisis. There is a very wide range of views. You guys have difficulty disagreeing with each other. Why don’t they have difficulty disagreeing with each other? Why is there such a difference of view about sovereign ratings?

Alastair Wilson: That is a very difficult question for me, as a rating agency representative, to answer. It is a question that needs to be put to those who hold those views.

Q330 Mr Ruffley: Can I just turn to Standard & Poor’s and your Banking Industry Country Risk Assessment, the BICRA, methodology? Could you just take us through the basis on which you give the United Kingdom a 3, which puts us in the same category as Canada, Germany, Japan and the US?

Moritz Kraemer: I can give it a stab. I try to be constructive and helpful to the Committee. Probably the person who would be better placed to answer this would have been my colleague Dominic Crawley, who was in front of you last month. The BICRA methodology is an assessment designed to evaluate and compare on a global basis banking systems. So not individual banks within a jurisdiction, but the banking system overall. That is also true for the UK, as for all the other 84 or 85 systems that we analyse in this way.

The two main areas are the economic risk and the industry risk. The 3 score, which is the BICRA score-which is not a rating, it is a score of relative strength-is held back largely by the economic risks, which have to do with the imbalances in the UK economy, which you could measure, for example, in the leverage of private households, in particular, and therefore with a credit risk in the books of the banks. This, for example, is a theme that you see in other sovereigns as well.

If you look at the root causes for the current financial crisis, it is our view it is not a fiscal crisis per se, but it has been a crisis of too fast credit growth and credit risk in the economy. The UK is certainly one of those cases. It is our view that the UK is currently in what we would call a correction phase. Basically what you have now is banks becoming much more cautious and reluctant to extend new credit, which, of course, comes with new credit risk exposure.

Q331 Mr Ruffley: Could I just stop you there because you break down your assessment of banking risk to credit risk and you have observed in some of the evidence that there is a downside risk on commercial real estate in the United Kingdom. Would you like to amplify on that?

Moritz Kraemer: I would probably think this would have been better covered on the 7 March session because there you had the man in charge of this particular process in front of you. I can talk in general terms about the main pillars of the BICRA, which I tried to do.

Q332 Mr Ruffley: Can I just switch to Mr Wilson on the banking methodology? That is the methodology that Mr Kraemer has talked about. That is something you subscribe to as well, is it not?

Alastair Wilson: I am sorry, what is something that I subscribe to?

Mr Ruffley: BICRA.

Alastair Wilson: We have a separate banking methodology, so I am not sure-

Q333 Mr Ruffley: What is it called?

Alastair Wilson: It is called the Bank Financial Strength rating methodology.

Q334 Mr Ruffley: Fine, okay. Let me track back a bit. What were your banking ratings in 2007 before the crash? How were you rating the UK economy? How good was your outlook? What was it assessing as the systemic risk in the UK banking system?

Alastair Wilson: The UK’s rating was AAA in 2007.

Q335 Mr Ruffley: Your rating was not very good as it turned out, was it?

Alastair Wilson: I am sorry. I do not understand the question.

Q336 Mr Ruffley: Are you aware there has been a financial crash in the United Kingdom? What I said to you was, what was your rating prior to that crash of the UK banking system?

Alastair Wilson: We do not have a single rating for the UK’s banking system. Our methodology does not take a system and give it a rating. We only apply ratings to individual institutions, which is why I found it difficult to answer the question about the rating for the system as a whole.

Q337 Mr Ruffley: So you do not subscribe to the system, for instance, that Fitch have for a country. Mr Riley, you have a system, do you not, that rates the banking strength of a country?

David Riley: We do. There are two aspects of our system rating. One is just simply taking the standalone rating-

Q338 Mr Ruffley: Let us just talk about the country because there is a submission here that you have said that the UK budget is neutral for AAA and, under your system, you have intermediate risk assessment for the UK economy and you have an intermediate risk for the institutional framework and an intermediate risk for competitive dynamics, which is competition in the banking system, and a low risk assessment of systemic-wide funding. On the assessment that you make for the UK banking, what is that now?

David Riley: Our assessment on the UK banking-

Mr Ruffley: UK banking system. You have scored it, have you not?

David Riley: Our banking team have made the scoring on the UK banking system. That is their primary analytical responsibility and lead. We draw on some of that information to pass-

Q339 Mr Ruffley: Just so we are talking about the same thing, you break it down to institutional framework, intermediate risk assessment, competitive dynamics and system-wide funding. That is right, isn’t it?

David Riley: I understand that to be correct, but I am not very-

Q340 Mr Ruffley: I am reading from Fitch Ratings 21 March 2012 where it says, "UK budget is neutral for AAA status."

David Riley: Sorry, you are switching between a comment about the UK budget and-

Q341 Mr Ruffley: Listen, can you stop talking? I ask the questions. You answer the questions. Is it the case that you put out something called, "UK budget is neutral for its AAA status", Fitch Ratings Limited 21 March. You are or are you not Fitch Ratings?

David Riley: That is correct.

Q342 Mr Ruffley: Thank you. Do you know what I am talking about?

David Riley: I do not have a copy of the document that you are referring to in front of me.

Q343 Mr Ruffley: It, at length, breaks down the fact that you give a score for the United Kingdom and you break it down for an intermediate risk on institutional framework, intermediate risk for competitive dynamics, which is the competition in the UK banking system, and low risk assessment for systemic-wide bank funding. Now, have you the faintest idea what I am talking about, because this is your own document? Do you think it is sensible coming to this Committee under-briefed and not knowing your own business’s releases?

David Riley: I think that is an unfair comment.

Q344 Mr Ruffley: Do you know what I am talking about? You just said you did not know what this document was about. How is this Committee able to ask questions when you come along complacent, sometimes smirking. I want to know what your assessment is and why of the UK banking system at the moment. Now answer the question.

Chair: I think it would be helpful if you give a short reply, then I think I will be bringing in somebody else.

Mr Ruffley: No, I want to ask a question after that; a quick one.

Chair: Ask the supplementary now, David.

Mr Ruffley: I want to know what your rating is for the UK banking system, Fitch.

David Riley: I am not familiar with the document that you are referring to, so I cannot answer that question. My apologies-

Mr Ruffley: What is it?

David Riley: -for being insufficiently briefed-

Mr Ruffley: By being incompetent.

David Riley: -on the UK banking sector. I am responsible for sovereign ratings at Fitch, not for all of our banks.

Mr Ruffley: Can I ask one final question? This will be my last question?

Chair: Very briefly.

Q345 Mr Ruffley: Fitch, as an organisation, what did it rate the UK banking system in 2007?

David Riley: I am not in a position to tell you that.

Mr Ruffley: Useless, absolutely useless.

Q346 Chair: These are issues that you are not directly responsible, as I understand it.

David Riley: That is correct.

Mr Ruffley: Hopeless. All of you.

Q347 Mr Mudie: I am the good cop. You have a fairly dismal report from ESMA in view of their last inspection, "Inadequate transparency of methodology, problems with disclosure and presentation of ratings, inadequate governance arrangements, inadequate resources supporting ratings and the use of new inexperienced staff on too many occasions". Now, apart from that, was everything else all right? Were these criticisms justified?

David Riley: I can speak to the onsite inspection that was conducted at Fitch with respect to our sovereign ratings. We had detailed discussions and they reviewed our files while onsite. My understanding at the time of that inspection was that, broadly speaking, the Fitch sovereign team was adhering to the process, procedures and regulations that ESMA were reviewing. My understanding is that we are still awaiting, as a rating agency, the detailed feedback from ESMA and if there are things that we need to address in the way you have highlighted, we will address them.

Q348 Mr Mudie: Are you not aware then of these findings, is that what you are saying, or you know of them but you are waiting for a detailed official formal letter?

David Riley: I am certainly aware and have read the report that I believe you are referring to, which provides a kind of generic overview of the three agencies that were reviewed.

Q349 Mr Mudie: They refer to one or more of the three agencies they had inspected and you are all at the table. So it is either one or two of you fit into this, but do you think they are justified?

David Riley: I think they have highlighted a number of potential risks relating to things like resources, as you have highlighted, which we recognise as potential risks. If it is identified that there is a shortcoming on the side of Fitch, whether it be in sovereigns or in other analytical groups, we will address those. I think they are highlighting potential shortcomings and risks, was my understanding, rather than saying that there are systemic shortcomings in the conduct of the ratings agencies with respect to the regulations that ESMA is governing on the rating agencies.

Q350 Mr Mudie: I would just like to take you up on that. I am not sure they are potential. They are what they planned. There is nothing potential about it. Systemic is another question, but they raised important points after the inspections and indicated that one or more of the three of you were found wanting in these areas. There is nothing potential about it.

David Riley: As I say, I can only speak to Fitch and it is my understanding that there weren’t serious shortcomings in the review that ESMA has undertaken, but I also understand that ESMA is yet to revert to us with a detailed report of their review.

Q351 Mr Mudie: Mr Kraemer, do you have anything to add?

Moritz Kraemer: I can talk about the part of the process I was involved in, which is the onsite process for the sovereign ratings team, and I can confirm that ESMA did a pretty robust and thorough investigation looking into our files. It is my understanding that the final conclusions are still to come. There was an initial draft. That is my state of information. We take that very seriously. From what I took away, ESMA did comment on certain areas of improvement that have to do with record keeping and that have to do with areas of recording committee conclusions, which are remarks we take very seriously and we have been working on those areas to make sure that this is-

Q352 Mr Mudie: The four areas I have mentioned, are you looking at these four areas as a result of your interim knowledge of their findings?

Moritz Kraemer: I am not sure I recall all the ones that you mentioned. I don’t think they would be applicable. When we talk, for example, about inexperienced analysts, which I think is the gravest of all concerns here, for me, as an analytical manager, it is something that I would be very worried about.

Q353 Mr Mudie: It must have been one of the other two.

Moritz Kraemer: As I said, I think the final agency-by-agency conclusions are still outstanding. From my perspective, I would not subscribe to that view for Standard & Poor’s.

Q354 Mr Mudie: Mr Wilson, do you want to add anything?

Alastair Wilson: My personal responsibilities are for raising policy not for the communication with regulators, so it is rather off my patch. As my colleagues have said, I think the challenge to be faced is that these are generic findings. It is difficult to know precisely what ESMA think in relation to each rating agency until we see a specific finding.

Q355 Mr Mudie: I have two questions. The important point is the methodology and transparency of it. They found, "Methodologies underlying credit rating decisions for some products continue to be found in multiple documents published in different periods not easily identified on the CRA’s webpages." They went on to say, "Methodologies published by one or more reviewer on the rating categories in the selective sample do not always provide a clear and exhaustive overview of the criteria and models used and how these criteria contribute to the eventual rating decision." Now, that is fairly important I would have said.

Moritz Kraemer: I think it is an important comment. I would say to this-

Mr Mudie: Not guilty?

Moritz Kraemer: Well, we are talking about sovereign ratings here. We have one piece of methodology that is two clicks away from our standardandpoors.com website. It is something that we put out in June 2011, superseding our previous criteria, adding a lot of layers of transparency.

Q356 Mr Mudie: If I looked at your methodology I would find it all in one place not as they are suggesting, broken up?

Moritz Kraemer: You would.

Q357 Mr Mudie: You are nodding.

David Riley: I am nodding because in the case of our sovereign rating methodology that is the case. The ESMA review obviously was across all of the assets and asset classes that are rated by each of the agencies. I know that in addition to sovereigns they looked, in particular, at covered bonds and that of banks. Inasmuchas this shortfall was in the transparency of the research and its accessibility and so on then we would certainly make changes to make it more accessible and more transparent. But, with respect to sovereign ratings, we have a single document that sets out our methodology which is freely accessible.

Q358 Mr Mudie: So sovereigns is accessible. Mr Wilson, this is not your area?

Alastair Wilson: Not really my area.

Q359 Mr Mudie: Okay. That is important because in all the written evidence you each get very upset about three of the Commission’s further proposals for further action and one of them is, "Rating agencies will have to seek and receive approval from ESMA before making changes to analytical methodologies and criteria and also be required to develop a harmonised rating scale in parallel with their existing rating scale", so you could be compared. Now, that is one you are getting hot under the collar about. Could you just take the opportunity to explain why you are so excited about that? They are simply saying that you should not make any changes without clearing it with the regulator and, secondly, you should run parallel in methodology a transparent model that is similar to each, so a customer can look at you and see how you are doing.

Moritz Kraemer: I think what you are referring to is in the CRA III legislative proposal, ESMA’s powers to approve or disapprove of rating methodology changes. We do indeed believe that this would be a negative development. First of all, it would lead to what we consider undue regulatory influence into the substance of the rating, into the true analytics, rather than the processes surrounding the ratings, which is something that the current regulation of rating agency precludes. There was a clear division of labour between regulation and analytical work. I think this clear demarcation would fall by the wayside. It would also lead to unintended consequences potentially; what you seem to be worried about, that the rating agency speaks with one voice and, "Why is there three of you or seven or however many if ESMA were to be in a situation to approve certain methodologies?"

The chances are that the methodologies would be pretty similar and, therefore, lead to less diversity of opinions and more aligned ratings across the competition, which I think would be negative for investors because it would reduce the information available to them. It could also potentially slow down the methodological adjustments to new realities. The methodology is not something that is cast in stone. That is under annual revision at least; sometimes, as the case may be, at short notice if the situation changes.

If you have an approval process you have to go through these changes, which may be warranted from the analytical point of view, may take longer to make and, therefore, reduce the quality of the ratings. It may furthermore-and I stop after this-increase another risk that some politicians are worried about, the over-reliance on ratings. If you are an investor and you have your ESMA-approved methodology you might think, "Well, that should be all right then", and reduce their own analytical effort rather than increase it, which I understand is the intention of the European policy maker.

David Riley: Just briefly, because I think the arguments have been well set out by Mr Kraemer, there is a fundamental principle that is recognised in the existing European regulatory framework and that is maintaining the independence of the rating opinions. Those rating opinions are based on our criteria and methodologies that are developed by each of the rating agencies. So it is a fundamental principle that we think is important to respect and maintain the independence of the rating opinions and not undermine that, inadvertently or otherwise, as a result of approval processes with respect to the analytical aspects of what we do.

Q360 Mr Mudie: If they went ahead with this, what would you do?

David Riley: That is a question I genuinely could not answer, I am afraid. That is a question above my pay grade.

Moritz Kraemer: We would work according to the European regulation.

Mr Mudie: Very good.

Q361 Andrea Leadsom: I just really want, as a final question, to ask all of you, do you understand why politicians and indeed regulators are so concerned about the credit rating agencies’ impact on Government policy? Specifically, Nicolas Sarkozy quoted in The Financial Times that the only thing he had to worry about was preserving the AAA and we have seen a lot of that also in the UK where there has been a lot of talk about the austerity packages needed to preserve the AAA. So can you understand why sovereign ratings in particular are treading into very dangerous territory vis-à-vis politics? Can you tell me, each of you, are you discussing this at the highest levels in your ratings agency and are you taking into account at all going forward, or did you previously take into account at all, the political impact of the timing and the consequences of your ratings? Mr Kraemer first.

Moritz Kraemer: Yes, thank you very much. Two interrelated questions. Let me take them in reverse order. About the timing; we hear that regularly and say, "Well, we can understand what you are doing but why are you doing it now? Couldn’t you wait until after the summit?", or, "Couldn’t you wait until after the budget", or, "Couldn’t you wait until after we issue the benchmark bond next week?" Now, the answer to all of this is no. We have to disclose our opinions on an up-to-date basis to the marketplace. If our opinions change then we have to communicate this to the investor community. This is our duty. We are not operating in a political environment where we are trying to collaborate with the Commission or national Governments on producing any certain outcomes. This is not our role. The rating agencies’ role is much more limited and this is to opine in a forward-looking fashion on credit risk and sometimes we agree and sometimes we disagree.

On the first part of the question, do we take note of political movements or individual politicians taking ratings as a target for policy, saying, "We want to maintain the AAA-rating", of course we notice that. But we need to understand we are not collaborating with the Government in a way and saying, "If you want to keep the AAA-rating what you should be doing is A, B and C", because that, again, is not our role. We could not possibly be in any shape or form in an advisory capacity with the Government and afterwards opine on credit risk because we would be part of the process.

On the other hand, if there is a Government raising the rating on the political agenda this should not preclude us from playing our role, which is opining on credit risk in a way that we would say, "Well, we would think that the rating should be lowered by a notch", for example, "but Mr So-and-so in Government has said this would be against the objectives of the Government", because this would impede our independence. So the fact that sometimes Governments do raise ratings in the official discussions about the objectives of the Government is something that we note. It is not necessarily something that we welcome or would have any view on, whether it is advisable or not. But it is nothing that should prevent us from doing the job as we understand it, which is to opine on credit risk in an independent fashion, because if we were to take that into account as a factor of what to decide and how to communicate it our independence would start to go on a slippery slope and we want to prevent that at almost any cost.

Q362 Andrea Leadsom: So just very quickly to come back at you on that point, how often, then, do you do a review? For example, would you review the British credit rating immediately following the budget announcement as a matter of course, for example? In the case of the US, if you knew that they were about to renegotiate a debt ceiling, would you then carry out a review in the aftermath of that or do you have a sort of quarterly review that you do regardless? Or how does that work? Do you respond to events or don’t you?

Moritz Kraemer: We do respond to events. As a general rule, there is a minimum standard that is being set where you have to have at least one credit committee per year. Now, this is pretty minimalistic and it may be appropriate for some sovereigns where there is not much happening. In some cases this is the standard that we apply. In the cases that you refer to, as you can imagine, these are important events that you describe. We would call a committee and deliberate on what the implications are for our view of creditworthiness of the UK or the US.

So indeed we have credit committees much more frequently in those cases and whenever the rating changes we will, of course, within the bounds of the regulation, communicate this as quickly as we can. Sometimes, if we don’t change the rating, we do not communicate it because every day the rating is not changed it is implicitly affirmed. So if a committee concludes that a rating is all right, we don’t have to put out necessarily a press release that we affirm the rating. We can choose to do so if we believe there is investor interest in our views at a particular point in time, but the main obligation is to publish, as quickly as we can under our regulatory constraints, any rating or outlook changes as they are decided by the credit committee.

Q363 Andrea Leadsom: Mr Wilson, anything to add to that?

Chair: Briefly, if possible, because there are a couple of other things we want to raise.

Alastair Wilson: We monitor ratings continuously. We review them annually. Whether we would assess the need for a rating change would depend very much on the magnitude, the importance of the development.

Q364 Andrea Leadsom: So is there somebody in Moody’s whose job it is to keep an eye on the UK, for example, and to highlight anything on a minute-by-minute basis? How does that work?

Alastair Wilson: That is the prime responsibility of the lead analyst but it is the responsibility of the entire sovereign rating team and it is a responsibility to which the credit policy function would contribute; it is responsibility to which a wide range of individuals within Moody’s will contribute.

Q365 Andrea Leadsom: Mr Riley?

David Riley: Yes. We have a regulatory requirement to provide issuers with 12 hours’ notice of any pending rating action, which obviously we adhere to. There are regulations that govern the disclosure of potentially market-sensitive information, which also applies to ratings. Where we are able to meet those requirements and an issuer, a sovereign, has asked us to issue at the end of the relevant business day and we are able to accommodate that request then we have done so. But where we have had requests to delay for a longer period because of forthcoming political auctions or whatever then that is something that we have not agreed to because we don’t think that would be consistent with us providing the market participants and potential users of our ratings with an up-to-date view.

Q366 Chair: Mr Kraemer, if I can take you back to the discussion we had at the beginning of the session, I just want to clarify one point of fact which is still somewhat unclear to me. Did you have a rating committee meeting immediately before the US downgrade to take that decision and then a second one in order to take account of the American Government’s response prior to publication? Is that what you said?

Moritz Kraemer: Let me try to jog my memory. We did have a series of committees on the US. This was a fast, developing story. It wasn’t on a daily basis but it was very frequently. Since I was not part of the team visiting the Treasury, I would not be 100% certain to slot which came first, but it is my understanding that, if I remember correctly, following the discussions with the Treasury in Washington, the committee reconvened and that was the committee that took the final decision on the rating action that was then published.

Q367 Chair: That was the committee meeting that took the final decision?

Moritz Kraemer: That was the committee that took the final decision.

Q368 Chair: Perhaps you could confirm that to us in writing; I would be grateful if you would. One other issue has come up quite a bit in the evidence we have taken and indeed in the last session. Perhaps I could go to you, Mr Wilson, for an answer. A great deal of detailed work and research, indeed you were intimating exactly that a moment ago, lies behind each of the ratings for the major countries. That research is used to apply the methodology that you have built up and it applies across countries. Why not publish all the research?

Alastair Wilson: Whenever we take a rating action we will publish a press release that will contain substantially all of the analysis that has gone into our action.

Q369 Chair: But there is a heap of research behind all that and a heap of ratings work, is there not? Why not publish that, making all the underlying credit opinions as well as the headline rating on sovereign available? Would that not encourage investors to focus on the analysis rather than simply look at the ratings, a point that you have all been making to us?

Alastair Wilson: The full range of research is available.

Q370 Chair: But it is not, is it? You meet behind closed doors on the basis of a heap of detailed research, most of which is not published but only the key points, as you see it, are published; those that are subsequently put in the press release. That is correct, is it not?

Alastair Wilson: We will publish-

Q371 Chair: Just let us be clear. That is correct, is it not?

Alastair Wilson: By "publish" do you mean put on our website? We have very detailed analyses, typically, for each issuer. So for the UK, last December we issued a quite detailed special comment setting out our views on the rating; setting out our views on all of the factors we take into account in determining the UK’s rating. It tries to be readable but detailed enough to provide an understanding of our analysis. The intention is to achieve precisely that, to be transparent and open in why we have reached the decisions we have reached.

Q372 Chair: I am still trying to get an answer. I will have one more go. Why not publish all the underlying research and the views that have been expressed at your rating-committee meetings? Why not open up the whole process, provide more transparency? Even the Monetary Policy Committee of the Bank is able to publish very detailed minutes.

Alastair Wilson: What is most important to us is this. We have a Moody’s rating. That Moody’s rating needs to reflect a Moody’s view. Most important to us is that what we publish makes very clear what the rating is and why it is where it is; what the Moody’s view is. I think you might almost risk obfuscating the clarity if we published a range of preliminary research that was not necessarily consistent with that rating.

Q373 Chair: I have to say people will find it very bizarre that publishing more material would lead to obfuscation, but I want to see whether Mr Riley has anything he wants to add on that.

David Riley: Much of our sovereign research is freely accessible; the special reports that we publish for example on the United Kingdom, the US and Iceland in the past. I think we would certainly review and be sympathetic to the potential of providing our sovereign research free of charge, although ultimately that is a commercial rather than an analytical decision and I do not have responsibility for that.

Q374 Chair: Don’t worry about the commercial side. Let’s just concentrate on the point in principle.

David Riley: I am very sympathetic, and we are as an agency-

Chair: More sympathetic than we have just heard from Moody’s.

David Riley: To measures which would enhance the transparency, which would include providing a greater range of research.

Q375 Chair: What about publishing the minutes of the Sovereign Rating Committee meetings?

David Riley: Currently we would view our current press releases essentially as a summary of the key judgments that have been reached with the rating committee. They should broadly reflect the key judgments.

Q376 Chair: But it is a consensus after all the debate has been had. What I am suggesting is you set out the debate.

David Riley: I think that is something that we could look at and consider. I think there are some difficulties with that because, when we have debates within the rating committee, first of all we do sometimes have confidential information that we would not be able to disclose into the public domain through minutes or other research material.

Q377 Chair: Provided to you by the sovereign concerned?

David Riley: Provided by the sovereign authorities. That may disclose feedback that we have had in discussions over policy scenarios which, again, would be sensitive for disclosure and we want to encourage a rigorous dialogue and debate within the committee. I am not saying this would be exclusive, but a potential danger is the publication of minutes would potentially render that discussion less rigorous and robust than it currently is.

Q378 Chair: You could do what the Monetary Policy Committee does in those exceptional circumstances, redacts slightly their material. Do you have views on this, Mr Kraemer?

Moritz Kraemer: Yes, I do, Mr Chairman. I think a two-pronged answer. I think most of it is there. We publish twice a year our whole data set that goes into the sovereign ratings. If you look at the methodology and combines of the data that is published by us, which are our own forecasts that we use as a basis for our decisions, and then plug them more or less in the criteria, I think an informed observer should be coming pretty close, to within a notch at least, to our same conclusions. So you can make your own assumptions about where you think the indicators will change and what that would mean for the rating going forward. In terms of the minutes, it is an excellent question that we are asking ourselves repeatedly and discussing internally. It is currently our view, and has been our view for some time and especially in times like these, that it might lead to-if you have the participants of the committee published, how they voted; what their views were-

Q379 Chair: You can anonymise who said what.

Moritz Kraemer: Yes, you could do that. I don’t think it is so absurd with the obfuscation. If you publish, for example, all the scores in our methodology, how the votes were coming in one way or the other, you would detract from the broader line of argument that we are trying to make. I think you would have the risk that we see in other indicators that the system is being played.

Chair: Okay. Well, it is something that maybe is worth thinking about. All those arguments that you have all come forward with in varying degrees, least of all Fitch, were deployed with respect to keeping a high degree of confidentiality over discussions prior to interest rate changes and we have discovered that we can live with a very high level of transparency and in fact we are much better off as a consequence. Thank you very much for coming to see us this morning. It has been extremely interesting. We have picked up a lot. We may need further exchanges in written form. We have already asked for one and we are very grateful. Thank you very much.

Moritz Kraemer: Thank you

Prepared 30th April 2012