Ratings agencies take center stage in euro crisis

By Kevin Voigt, CNN

January 14, 2012 -- Updated 1156 GMT (1956 HKT)

STORY HIGHLIGHTS

Ratings agency S&P warned in December that 15 eurozone nations may face possible downgrade
The "Big Three" credit ratings agencies catalyzed market reaction during the financial crisis
Critics complain the agencies wield too much unchecked power in world markets

(CNN) -- The mere rumor of a downgrade by the major ratings agencies is enough to send world markets into a tailspin, wiping billions off the values of global stocks.
So what do ratings agencies do, and why are they so important?
Who are the credit ratings agencies?
The "Big Three" are Standard's & Poor's, Moody's Investor Services and Fitch Ratings. All originated in the United States, although Fitch has dual headquarters in New York and London.
What do they do?
Before you can get a credit card, banks run a credit check on you. Similarly, the ratings agencies run credit checks on companies, countries and financial products.

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Countdown to save the euro

EU leaders talk possible treaty changes

Countries are rated on a sliding scale: Germany for example, has a top rating (AAA) which allows it to borrow cash at cheap interest rates. The lower the rating grade, however, the higher interest payments a nation must pay to attract investors to buy its bonds. Anything that slips to junk status -- as Ireland, Portugal and Greek government bonds are rated -- is considered a "highly speculative" investment. Furthermore, the pool of eligible investors is reduced -- many institutional investors, such as government pension funds, are forbidden to invest in junk-rated bonds.
Why do they wield such power?
Investors across the world look to credit rating agencies to judge where to place their bets in the market. For governments, the ratings agencies have a lot of power over the popularity of bonds: cash given to governments by investors that, over time, will pay a return on the original investment -- unless the government defaults.

http://edition.cnn.com/2011/12/06/business/eu-sp-eurozone-explainer/index.html?hpt=hp_c1

Merkel Vows Faster Eurozone Reforms After Downgrades

"We are now challenged to implement the fiscal compact even quicker ... and to do it resolutely, not to try to soften it," said Germany Chancellor Angela Merkel on Saturday.