Why are these three businesses the ones everyone watches?

Part of the answer lies with the US Securities and Exchange Commission (SEC).

In 1975, it acknowledged these three as Nationally Recognized Statistical Rating Organizations (NRSRO).

An endorsement from an NRSRO makes life easier for countries and financial institutions wishing to issue bonds. It basically tells investors a firm has a good record and indicates how likely it is to be able to pay back the money.

The SEC actually has 10 NRSROs on its approved list, including a Canadian agency and two Japanese ones. The big three - Standard & Poor's, Moody's and Fitch - remain the industry standard-bearers.

This is partly because they make their ratings available freely to investors - making their money from charging the organisations who want their bonds rated.

So how do the agencies form their judgments?

Standard & Poor's says a committee of between five and eight people decides the actual rating.

They base their assessment on a range of financial and business attributes that might influence the repayment, some of which may depend on the issuer of the bond (i.e. the borrower).

When asked why it changes ratings, S&P responded: "The reasons for ratings adjustments vary, and may be broadly related to overall shifts in the economy or business environment - or more narrowly focused on circumstances affecting a specific industry, entity, or individual debt issue."

But since the credit crisis began in 2007, these agencies have come in for heavy criticism.

The potential for a downgrade to destabilise a country was so feared that the European Parliament this year agreed a set of rules designed to rein them in.

They state that agencies can issue ratings on countries no more than three times a year, and only after markets have closed.

Europe also wants to dilute the power of the Big Three rating agencies by encouraging financial firms and others to do their own credit assessments.

I. Vocabulary:

rating agency – рейтинговое агентство

rating – рейтинг, кредитный рейтинг

borrower – заемщик

borrow – заимствовать, брать кредит

charge – взимать плату

suffer a downturn – переживать спад

demand higher returns – требовать более высокий доход

downgrade – понижать кредитный рейтинг; понижение кредитного рейтинга

AAA – высокий кредитный рейтинг

creditworthiness – кредитоспособность

bond issuer – лицо, выпускающее долговые обязательства

issue IOUs – выпускать долговые обязательства

bonds

grade the value of stocks and bonds – оценивать стоимость акций и облигаций

operating income – доходы от основной деятельности

Securities and Exchange Commission (SEC) – Kомиссия по ценным бумагам и биржам США

Nationally Recognized Statistical Rating Organization, NRSRO – Национально- признанная статистическая рейтинговая организация

endorsement – одобрение

standard-bearer – флагман

assessment – оценка

repayment – выплата долга, погашение долга

ratings adjustment – корректировка кредитного рейтинга

come in for heavy criticism – подвергаться суровой критике

dilute the power of the Big Three – снизить, уменьшить влияние “Большой тройки”

II. Answer the following questions using as many vocabulary items

as possible:

1. What is a rating agency?

2. What are the three most powerful rating agencies?

3. How can a downgrade of the rating affect the borrower? Give examples.

III. Write an essay of 180-200 words on the history and activities

Of the Big Three.

BONDS, PROJECT BONDS AND EUROBONDS

The idea of Eurozone economies clubbing together to issue bonds representing all member nations has been gathering momentum.

And it has some pretty influential backers, including French President Francois Hollande, and the President of the European Commission Jose Manuel Barroso.

But those that really matter are less keen.

The German government has said eurobonds "don't make sense" right now, given that individual member states conduct their own economic policies. It is also concerned the introduction of such bonds could reduce the resolve of highly-indebted governments to balance their budgets.

There does, however, appear to be a compromise in the works. The Germans seem open to the idea of "project bonds" that can be used to finance infrastructure investment across Europe.

But what are eurobonds and project bonds, and what are the government bonds on which they are based?

What is a government bond?

Governments borrow money by selling bonds to investors. A bond is an IOU. In return for the investor's cash, the government promises to pay a fixed rate of interest over a specific period - say 4% every year for 10 years. At the end of the period, the investor is repaid the cash they originally paid, cancelling that particular bit of government debt.

Government bonds have traditionally been seen as ultra-safe long-term investments and are held by pension funds, insurance companies and banks, as well as private investors. They are a vital way for countries to raise funds.

What is a bond market?

Once a bond has been issued - and the government has the cash - the investor can hold the bond and collect the interest every year until it is repaid. But investors can also buy and sell bonds that have already been issued on the financial markets.

The price of the bond will fluctuate as the outlook for interest rates changes. So, for example, if the markets think that interest rates are going to rise sharply, then the value of a bond paying a fixed rate of 4% for the next 10 years will fall. Bond prices will also fall if investors think that there is a risk of the government that issued the bond not being able to make the annual interest payment or repay it in full on maturity.

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