Moody's rides out JDA storm

Moody's Investors Service seems to be weathering the fiasco over its new joint default analysis (JDA) methodology that led to the controversial upgrades of 101 banks in February and March and its subsequent U-turn.

The rating agency last month downgraded the debt and deposit ratings of 44 banks after revising its calculation methodology following a torrent of criticism from dealers and analysts. Critics had claimed the new methodology over-emphasised the external support that troubled banks would receive from their governments, and resulted in too many banks being grouped in a narrow band of high ratings.

The revised methodology was published in late March, with the downgrades announced on April 13. Three Icelandic banks were the hardest hit, dropping three notches from Aaa to Aa3, having only been upgraded to Aaa on February 23.

"The glitch did not do anybody any good. We wish that this had never taken place, but we are happy with our Aa3 rating as the market is now in agreement with Moody's," says Gudni Adalsteinsson, Reykjavik-based group treasurer at Kaupthing, one of the banks affected by the rating change.

Matthias Einarsson, head of foreign funding at Reykjavik-based Landsbanki, says his institution was not affected by the ratings volatility as it didn't need to issue debt during that period. However, Moody's reputation could be affected by the debacle, he adds. "The application of the methodology went one step too far. Time will tell what it does to Moody's reputation," he says.


The implementation of the JDA did cause some disruption to the third Icelandic financial institution, Glitnir. The bank decided to delay the planned issuance of a $500 million extendible bond and a three-year floating-rate note during the uncertainty immediately following the bank's upgrade to Aaa. However, this only lasted a couple of days.

Despite this, an official at the bank says Glitnir does not envisage long-lasting damage to Moody's reputation: "Their standing took a momentary lapse with the press and stakeholders, but there should be no material long-term consequences of the JDA implementation. Moody's handling of this second phase was impressive."

Kaupthing's Adalsteinsson also believes the agency will weather the criticism of its handling of the JDA implementation. "These have been turbulent times for Moody's, but they will be gone and forgotten in the coming weeks and months," he says.

Anna Gordon-Walker.

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