>> mr. wilson, does moody's think that standard & poor's was right to downgrade the american credit rating? >> [ inaudible ] it is largely different. >> so do you -- do you share their concern that the united states might, in fact, be marginally less credit worthy than able and willing to pay its debts than the uk or finland and you have the u.s. on watch presently, do you? >> yes. the rating are the same, implying the same broad view of the probability of default. finland's aaa rating remains stable now. >> so with your negative watch on the u.s., you consider that the u.s. could become more likely to default than finland. is that the implication of that? >> the implication of a negative

watch is that the downside risks become marginally higher. >> and so do you think it is plausible and credible that the u.s. might have the desire not to repay its debts or the inability to repay its debts? is that really what your thinking is, and moody's? >> i think it's important to always bear in mind that these very high ratings, particularly aaa, whatever the outlook, that represents a view that there is a very strong willingness and ability to repay debts. so the negative outlook on the aaa does not reflect that view that there is significant risk of lack of willingness or goodness. >> right. and mr. riley, do you think that it's 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 agencies to behave? >> i don't think it's 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 incline. >> to what extent should rating agencies take into account the public nature of sovereign debt ratings at such a very sensitive time in the immediate afteramat of a public global crisis?

what credible in sovereigns? >> i think it's 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's what we say we do. that's what we seek to do, according to our published criteria. and i think in terms of helping to -- issues about sort of the post-crisis or during the global financial crisis or the country crisis in the eurozone and financial market volatility, then i think where we can help adjust that is not by pretending those issues aren't there but to

try to address them in terms of ratings in a very timely transparent manner. i think that's the reasonable thing for us to do. >> and do you worry that ratings agencies all move in the same direction at the same time? i mean do you have any completely -- can you give us any examples where you all completely disagree and have rated an entity completely differently? because we've heard from previous witnesses that the idea of several different credit ratings agencies is you're completely independent and would come to separate conclusions, yet in the case of the u.s. market we've clearly seen the entire market disagrees with s&p's downgrade. so that does suggest that either s&p and fitch and moody's were wrong to be so negative about the u.s.' ability and willingness to repay or that you're all guilty of group-think and the market is actually working in the opposite direction. so can you give us an example of

where you will completely disagree in ratings completely differently? >> in the sovereign base? >> in any space. doesn't matter. anything where you all completely disagreed? >> the defbs of completely disagree. we have different ratings. i would say we do have a different rating. >> let me be specific. do you have an entity you are on credit watch to upgrade where another agency has its own credit watch to downgrade, for example, where you're setting the direction in completely opposite ways? >> i'd have to check, but if my memory is correct, i think we'd move to a negative outlook on south africa and i think during that time i think moody's may have taken a positive rating action. there certainly have been instance where is each of the rating agencies have certainly maintained different ratings during different courses 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's because the fundamentals of our credit analysis is sufficient overlap, that they do differ, but sufficient overlap such that, you know, of rating opinions are likely to be, suffice some common factors. i don't think that implies where each a following the other. it's that there are some common factors which influence the credit worthiness of sovereign governments. >> so that might, then, question what point is of having so many credit ratings agencies or commercial companies who are charging significant sums of money all drawing the same conclusions. you're saying the results of obvious. soless no need to draw different

conclusions? >> i don't think you can infer that from the response that i've given. >> so what's the value of having the three of you there, if you all agree, bar margins, vo marg occasionally? neither of you are making a passioned defense of the u.s. economy and the fact downgrading them. why run making that impassioned defense? >> well, you've not asked us to make defense of particular rating. so it's not really for me to speak to -- the rating of another agency. >> i've asked mr. wilson if he thinks s&p were right to downgrade. he said they just don't agreagr. what's your opinion? >> we don't share s&p's judgment both in terms of the size, the commitment und of the budget control act in terms of deficit reduction or in terms of the ability of the u.s. to sustain a high level of debt than a number

of other sort of peer sovereigns because of the role of the dollar and the size and diversity of the u.s. economy. we do have a negative outlook, however, on the u.s., because in the absence of agreeing on a credit deficit reduction plan at some point in the future, even the u.s. will have a debt burden that is no longer consistent with it being aaa. >> okay. thank you. >> [ inaudible ] mr. wilson, the uk enjoys a aaa rating at the moment. moody's says that that aaa rating is accompanied with a negative outlook. can you explain the reason for that? >> yes. the negative outlook reflects the challenges that we believe the government will face in achieving its debt consolidation objectives, as a sequence of the

macro economic environment both in the uk and elsewhere in which is operating the uk's economy is sitting and as a consequence of the potential for further shocks to emulate from the euro area as a consequence of the debt crisis. >> if i pressed you and asked you about the key risks to the uk's aaa rating status, would you say it would more extend to exposure to problems of the eurozone or the trajectory of fiscal policy? >> the risks -- i think there's a first step and a second step. the risk -- our view is that in the absence of further macro economic shocks, the debt to debt would be restored and the debt, then, would become sustainable as a result of plans. the threats to the plans are in

the macro economic arena and those threats are both within, as consequence of the uk's domestic macro environment and as a consequence of the situation in euro area. we haven't sought to try to weight those two broad underlying threats to the debt consolidation trajectory. >> mr. kramer, do you -- just going back to what the chairman asked you about the u.s. experience. do you accept that you reached a very different verdict about the u.s., given that after you were downgrading bond yields failed by 1/5? >> no. i think the markets in the great ratings agency almost by definitions look at different things. we look at the long-term fundamental strengths and weaknesses of an issue. whereas market participants in -- will look at sort of the profitability of being in

certain instruments at a shorter period of time, and i would -- i would think there are many examples of that where sort of rating action is not being followed immediately by similar yield changes, and we don't have to go as far as the united states. you can see many of that happening in europe, for example, where it's standard & poor's. we lowered greece at early at 2004 and still the markets of bonanza went on another four years before it took a negative view as well. so i think this is quite unsurprising and not a judgment on whether the fundamental analysis of a ratings agency ask right or wrong, and this is, i want to express some surprise there is a perception at the

ratings agencies always seeing from the shame sheet because we've been discussing to credits right now, the u.s. and the uk, the three ratings agencies did you invite today has come to different conclusions. so i think the rating is certainly a point of observation of market participants taken into account. first of all, the rating dos 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, trying to have the sort of rank ordering of ratings according to yields. not least because this would undermine the stability of ratings, because if you analyze the yield developments, you will see that they're much more volatile and almost locastic is times, and therefore others give

a longer term benchmark of credit risk than what markets of doing. >> mr. riley, mr. kramer just told us ratings are one thing and market another. which is the more important? >> i think the more important is the judgment made by the market in terms of, of course, the investors or potential investors who are choosing to lend to an entity or a national government, or choosing not to. and the terms in which that borrowing is extended. so many in respects i do think that the role of the rating agencies, to be frank, is overstated. partly because one of the strengths, one of the strengths of the rating system is its simplicity. the simple rating scale, which

obviously you're aware of, and so if there's a positive or negative rating action, it's something which the media can report on very easily. but if a particular investor, you know, is taking a position in credit defaults, short markets or selling uk yields to buy german bonds or vice versa, that's something that is actually quite hard to communicate and not actually as transparent at the judgments being made by the rating agencies. so first and foremost, it's investors in the market deciding not the rating agencies. >> i mean, this is interesting. there's a huge political sensitivity around these ratings. the uk, the u.s., other countries. and europe, the rating agencies, you're basically telling us it's not unimportant. it's what the markets say that matters. in which case, why do people pay so much attention to your debits? >> well, because the -- well, i

think -- you asked me the question who is the most important and i gave you the response to that. do the rating agencies have a, an infinite role, i think they do in terms of providing information to investors important to their investment decisions. when investors are looking at a range of investment opportunities, particularly international investors, they're looking at the uk, maybe looking at canada. might be looking at sweden. might be looking at germany or the u.s. and the ratings which are providing a relative guide to credit quality along with the supporting research are wanting in the decision. >> would you agree with this promissory note, referring to this negative -- taken by a couple of ratings agencies and

he said, note that what we have seen is that the action the rating agencies recently have no impact of the people in the market will willing to lend to the uk government. what matters are the views of people in the market. not the view of the ratings agencies. >> well, as i think perhaps an agreement on speaking for myself on behalf of finch is that diddish-fitch is that we are not making recommendations in terms of big or selling nor, say, conducting such operations. does that mean that the ratings are irrelevant if that's the question really that you're asking, then i think there is a lot of academic research and research conducted, for example, by the fund that demonstrates over the longer term sovereign

ratings in particular have provide add good relative indicator and actually there is content in rating actions taken by the rating agencies and the mark over the longer term does correct things for these other factors, which influence the decision, taken into account what rating agencies are saying. >> thank you. >> michael fowler. >> you've worked hard at the uk public finances. what kind of credit rating would a scot attract? >> if i may, i mean, the controversy around our ratings of sovereigns that currently exist, don't want to speculate on those that don't exist. we don't know the arrangements under which independent scotland would come into existence, and so i really 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. >> but if we assumed, say, around 9% share of gdp on gang gla desh abangladesh what would be rating be? straight position? >> well, as you're aware, there is a lot of other issues associated with the governance of an essentially newly independent scotland. so it wouldn't just be the decision of the liabilities and assets of the united kingdom. obviously, that the treatment of the oil receipts what would be the monetary arrangements of an independent scotland, what would be the financial sector in banking supervisory arrangements? so there's a huge number of factors that would actually influence what would be what would actually be the rating.

so i genuinely don't think it's appropriate for really providing speculation as to what that rating would be. >> -- a country that doesn't have any history in the public finance markets to have a top aaa rating? sovereign without any history? >> and, well, history and track records are, can be important in terms of building credibility and, in fact, in our methodology and in our rating model, for example, we have a specific variable for payment records. you get benefit for having a clean payment record, and your rating is affected if you have an issue of failure of payments. >> can you deduce from that it would be pretty hard for scotland on day one to get anything near a aaa rating?

>> i think you're -- with all due respect i think you're trying to get plea to make a pronouncement about -- >> just asking -- >> -- in which i'm happy to -- >> must have done this for others that merged from eastern europe. this must have happened before? nuft have done it for montenegro and so on. so how would it work with scotland? >> go through the same process of analyzing the information and data that was available. i mean, scotland doesn't even have the national accounts. at this point in time. and obviously talk to the policy and authorities and then a sovereign rating. it your question is -- i mean, i'm not aware -- i'm not aware of these intensive fitch, and others can comment if they're aware of different circumstance, whereby a newly dependent

sovereign entity emerging in central, eastern europe, emerging from the end of the cold war has been assigned a aaa rating, but i think scotland, the transition of scotland in the united kingdom, i would suggest, would be very fundamentally different from the transition of some eastern europe countries from, you know, essentially the former soviet empire. >> i just want to know how like think is scotland will attract a aaa rating on day one. >> um -- and i -- i think i've answered the question. >> can mr. kramer help on that? >> i have nothing to say to that, and we have not said anything about this. i would take a similar line as mr. riley. there is basically no basis of information on which to -- if

you look at our methodology, you will see that one of the factors that we analyze when concluding at a sovereign rating, none of these factors are known. it would be irresponsible to comment on what a rating might look like. >> can you be sure scotland would have a aaa rating on day one? >> it's a highly hypothetical situation and any answer i gave would be highly speculative and misleading. >> have you given aaa ratings to any other newly emerged nation? >> i don't know the answer to that, i'm afraid. >> not that -- as i suggest, none that i'm aware of. i'm barely certain that there has ban case. >> it hasn't been the case. >> it has not been the case with respect to fitch. >> some newly nation gets a aaa on day one? >> correct. i'm not aware of any situation where we have assigned a aaa rating to a newly independent sovereign nation. >> thank you very much.

>> mr. chairman. mr. wilson, i see that you support, relatively speaking, a role -- support taken about the u.s. prepared to take your view of scotland. why are you competing with each other? >> why are we competing with -- >> why run competing with each other? >> why aren't we competing? >> yes. >> our role is to offer opinions on credit standing. the way we're structured is to, certainly the way moody's is structured is to dry a clear divide between commercial parts of the organization and rating parts of the organization. my role is within the credit policy area. the rating of the organization, and we focus on ratings. we focus on expressing opinions

on credit standing, and that that's -- >> as the euro crisis, the view of the importance in the factors of your ratings, when you rate sovereigns? >> the euro crisis has -- >> caused you to rethink the way you rate sovereigns? >> no, it hasn't. we apply the same methodology now as we've applied the last 3.5 year, which takes into account economic factors, institutional factor, government financial factor, and the potential tore event risks to emerge, and it's those four factors that we've applied consistently in determining ratings throughout the crisis. >> so the forefront again, the potential for risk -- and the other three? >> the first two are the economic environment, economic strength. the second is institutional strength. the third is the government's

financial strength, balance sheet and fourth is event risk. >> so why didn't you predict, for example, the situation in iceland, you know. island had a rickety banking system. you downgraded it three times within a year? >> the financial crisis has brought many lessons for a host of -- including rating agencies. as did the sovereign crisis. one of the lessons we've seen but hadn't observed before was the propensity for markets to act very, very quickly, from market consensus. change very, very quickly. and that was certainly a factor in the loss of credit worthiness -- >> and you didn't see that fact wler you made the assessment? >> certainly we didn't anticipate the speed with which the markets could lose confidence in the banking system, yes.

>> do you think that -- let me give awe factor you might want to consider in your sovereign euro crisis. the risk the stronger countries will be used to vet out the weaker ones. do you consider that? >> yes, we do. >> in the political category, of course? >> no. it would be -- i mean, it's something which we would factor into our assessment of government's financial strength, potential for contingent liabilities to emerge. >> do you think it's a situation of fraud that's been -- is now looking -- [ inaudible ] you now have a government that's potentially prepared to turn its back on austerity that is, again, tide to assisting countries that are still very, very weak in a flagging monetary context? >> what we said about france is that clearly we will need to stand back and understand the objectives of any incoming

government, once it's in place, but on the basis of what we've seen oh far, the broad objectives of the main political parties seem consistent with the debt consolidation plans which already are in place. >> there are other things being equal, do you think countries have their own currency have higher ratings than countries that don't? >> the ability to have independent domestic institutions is certainly a strength. it's a strength that we recognize and in the uk. >> and in the case, the ability to create evaluation is a strength as seen in the uk. no? >> it's certainly a factor which can boost economic growth. >> so other things being equal it should promote a higher sort of rating? >> the -- >> methodology that was necessary -- >> the methodology takes in a

wide host, range of factors. >> other things being equal, from what you've said, domestic institutions and the ability to -- currency that is of value? that is a value? you say that's a consequence of your view for sovereign rating? >> the ability -- existence of strong institutions which are able to support government policy is certainly a positive factor. >> i can't hear you stay but it is a consequence of -- words you used. do you think that the -- why is it, do you think, given some of the warm words of the imf that people feel so differently about the value for sovereign ratings? what's the explanation for that? >> sunot sure i understand the question. >> we've had some imf testimony suggesting that there has been a

ratings to perform -- during the crisis. okay? european commission has been very critical of ratings in the crisis. a very wide rachk views. why do these institutions -- you guys have disagreed with each other. why don't they disagree? why is there such a difference about sovereign ratings? >> that's really a very difficult question for me at a ratings agent to answer. it's a question that needs to be put to those who hold those views. >> am i to understand that the standard & poor's and your risk assessment, the 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 u.s.?