Time was when a country's financial credibility was measured by the amount of gold in its vaults.
Modern life has overtaken precious metal's capacity to underpin the credit standing of countries, or that of companies or individuals. Nowadays we often rely on some independent outside body to be an ‘impartial' judge of each borrower's standing, and so the credit rating industry was established.
As we have already seen, the standing or creditworthiness of a country or company is crucial as it affects the rate of interest that will be applied to its securities. The assessment of its standing is made by credit rating agencies (CRAs), which, after a thorough investigation, issue a rating that is generally accepted worldwide as a reasonably accurate evaluation of the issuer's relative ability to avoid default, and the likely payout should default occur.
Borrowers pay to have their bonds rated by the CRAs. Standard & Poor's, Moody's and Fitch Ratings are the three most important credit rating companies, but there are also many less well-known CRAs in North America (e.g. Kroll Bond Rating Agency, DBRS and Morningstar) and in other countries, including Dagong from China.
Standard & Poor's was founded in 1860 by Henry Varnum Poor to give information about US railroad companies, but did not assign ratings to corporate bonds until 1922. Moody's was established in 1900 by John Moody to give statistics on US bonds and shares, providing its first credit rating in 1909. Fitch was founded in 1913 by John Knowles Fitch to provide financial statistics to help the US investment industry and began rating in 1924. Dagong is a relative newcomer, founded in 1994.