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IMF preaches moderation: One shot of Moody's with an S&P chaser

By Howard Schneider
It is annual meeting season for the International Monetary Fund and World Bank, and the festivities kicked off Wednesday with the release of the first bits of the IMF's latest Global Financial Stability Report.

Bottom line: One or two drinks daily is okay, at least when it comes to credit rating agencies. In a review of the role that companies such as Standard & Poor's perform in the markets, IMF staff concluded that -- like alcohol -- moderation is the key.

The agencies have been under a "cloud of suspicion," the IMF wrote, for not fully catching the risks involved in securities backed by subprime mortgages, which helped sustain the market for those investments until the crash.

And while the IMF said the ratings firms provide much good information, they have been given an outsized role by investors, government regulatory bodies and others who depend too heavily on their seal of approval -- and then are apt to flee a company or country en masse when there is a ratings downgrade.

Those "cliff effects" -- such as occurred when ratings agencies downgraded Greece during that country's recent crisis -- could be moderated if the agencies better sketched out the limits of their knowledge or the probabilities of a worse-than-expected performance by a company or firm.

Most important, the agency said, credit agencies should be used as just one piece of information.

"It's all about moderation," said IMF global stability division chief Laura Kodres. "The moderate use of credit rating agencies are acceptable for a healthy financial system. It is not that we think credit ratings agencies are a bad thing. They are a good thing in moderation...Just like a doctor would tell you that drinking is okay in moderation."

More reports will be rolling out over the next few days, but one theme is already apparent: Both in the report on credit agencies and a companion piece on global liquidity problems, the IMF feels more needs to be done -- beyond the rules enacted by individual countries or the banking regulatory panel that meets out of Basel, Switzerland. Whether countries are up for that discussion -- after months of debate over reform and tough politicking by the financial industry -- is another matter.

By Washington Post Editor  | September 29, 2010; 3:21 PM ET
Categories:  International Monetary Fund  
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