It has long been suspected. Still, it is shocking to learn that all the three major local credit ratings agencies manipulated the credit worthiness of corporations and their debt.

The agencies either gave higher grades than their actual assessment or delayed downgrades for companies in return for securing business contracts with them.

More specifically, in some extremely foul cases, agencies approached firms saying that they would give favorable credit ratings if they were given contracts to evaluate the companies’ credit worthiness. Some companies contacted more than one credit ratings agency and gave the contract to the one who promised the highest grade.

In short, the agencies and their corporate clients traded credit ratings for mutual profits.

The Financial Supervisory Service said that all the three agencies ― Nice Investors Service Co., Korea Investors Service Inc. and Korea Ratings Corp. ― were found to have engaged in these practices.

Credit ratings agencies are tasked with assessing a business or government’s ability to pay back their debts and the likelihood of default. The credit rating is essential for measuring each company and the government’s financial health and is used by investors and other market players in making important investment and other business decisions.

Any distortion of these all-important credit ratings could cause serious problems in the capital market and the market economy as a whole, and even lead to an economic crisis, as in the case of the 2008 global crisis.

The global financial crisis was caused in part by the failure of global credit ratings agencies to properly rate the credit worthiness of subprime mortgage derivatives like the collateralized debt obligations and credit default swaps.

Here in Korea, the collapse of Tongyang Group is a good example. Last year, the credit ratings agencies failed to alert investors to the cash crunch facing the conglomerate, which was eventually put under court receivership. It inflicted a huge loss on as many as 50,000 investors.

The FSS uncovered the misdeeds of the three credit ratings agencies while investigating the Tongyang case. It truly is a big problem if the practice is so rampant that when getting the credit rating of a company from a Korean credit ratings agency, one may assume that the actual rating is lower by at least one notch.

This practice is tantamount to fraud, which threatens the fundamentals of the capital market and it must be uprooted by all means.