Doubts about the role of credit rating agencies in evaluating dud US mortgages were first voiced by former French president Nicolas Sarkozy in the immediate aftermath of the sub-prime crisis. Five years later the US government’s charges against Standard and Poor’s — of double-dealing, fraud and conflicts of interest — must be laid to rest before the financial system regains trust in a process that prices debt across much of the world. Institutional investors like pension fund managers in the US are required by law to base their portfolio allocation on the verdicts of ratings agencies. The creation of a more robust financial regulatory structure must necessarily exorcise the ghost of mala fide credit ratings. The $5 billion lawsuit against S&P, which rated the majority of the $1.41 trillion collateralised debt obligations backed by mortgage bonds between 2004 and 2007, will answer some of the questions America has been grappling with since 2008.

Rating agencies occupy a unique place in the financial landscape because they also rate government debt, making their relationship more nuanced. S&P has subsequently lowered the US sovereign rating over efforts to bootstrap the economy out of recession. The US administration has claimed the ratings downgrade is based on incomplete information. There is an element of subjectivity in every rating action, and this makes it all the more essential that the process is credible and transparent. Pressure by way of litigation can severely compromise the rating agencies’ independence and must be brought to bear in extreme situations. This could be one of them.

The rating experience in India has been less controversial. Domestic agencies began plying their trade just about a quarter of a century ago without any of the regulatory mandate their Western peers enjoyed. Although a thin market, corporate debt has sought the views of Crisil and Icra — now absorbed respectively by S&P and Moody’s — and rating is a permanent fixture of Indian finance. The Indian agencies still have their halos intact in part due to heavy regulation of the domestic financial sector. As oversight turns lighter, they too must be ready to face the arc lights.