"Who let these USA based credit ratings agencies become so powerful that when they issue a ratings downgrade the downgraded party's ability to raise capital is adversely affected by having to pay higher rates of interest, except the good old USA of course?"
In the good old days (early 1980s) investors and bankers did their own credit assessments. This required two things: 1. Credit Analysts; and 2. Managers prepared to take responsibility for the credit decisions.
One takes money and the other requires guts, and these can be in short supply in your average bank or investment company.
Then in the mid 1980's along came the rating agencies, saying "we will do it for you for less cost than you can do it for yourself" and everyone said "gimmie some of that".
The cracks first appeared when it came to the matter of who would pay for the service. The lenders/investors should have paid. If that was the case, the rating agencies would have looked after their interests first and done a thorough job. But the lenders/investors were greedy and didn't want to pay, so it was the borrowers who paid the rating agencies instead, as it was the borrowers who the rating agencies wanted to serve and keep on side.
The GFC comes along and the agencies are left with a major credibility problem, but their business model is unchanged, as the borrowers still pay for the ratings. That is, the corporate borrowers still pay for the ratings. Governments never did.
So recovering credibility for a rating agency is easy. Continue to go easy on the borrowers who pay to be rated, and beat up the borrowers who don't. It is the downgrades that get all the attention, and they can play the role of hard hitting credit analysts.
