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We're going to take a closer look at now at how those ratings for countries are put together. NPR's David Kestenbaum with our Planet Money team went to talk to the analysts at Standard & Poor's, the agency that downgraded Greek debt to junk status.

DAVID KESTENBAUM: Rating agencies got their start in the 1800s, rating railroad companies. But in the last few decades, they've been branching out and affixing their letter grades to much larger things.

Mr. JOHN CHAMBERS (Managing Director, Standard & Poor's): Virtually every major economy in the world is rated by Standard & Poor's.

KESTENBAUM: That's quite a task.

Mr. CHAMBERS: It is quite a task.

KESTENBAUM: That's John Chambers, who is in charge of overseeing those ratings at Standard & Poor's.

Are you actually involved in rating Greece?

Mr. CHAMBERS: Yes, I was.

KESTENBAUM: He's involved in rating just about every country. And rating a company seems fairly straightforward. You look at their financials. But how do you rate an entire country's government? There're all kinds of things to consider: Who will win the next election? What will their economic policies be? Who knows, maybe there will be a military coup.

And that is why when you rate a country, you do more than look at a spreadsheet. You have to actually leave your desk. Joydeep Mukherji also rates countries at S&P.

Mr. JOYDEEP MUKHERJI (Credit Analyst, Standard & Poor's): Any country, we have two analysts who go to the country for that rating. Never send just one person because, you know, you need to have a second pair of eyes.

KESTENBAUM: I think there are people listening to this who would say: Just two? Shouldn't you be sending 70 to rate a country's government?

Mr. MUKHERJI: To be fair, what we're looking at is fairly narrow: Can you pay your debt fully and on time? What's your ability and willingness to do so? You know, I think two people - this has been our practice. It's worked well.

KESTENBAUM: Mukherji says the analysts will spend at least a few days meeting with officials at the ministry of finance and the country's central bank. They'll also talk to politicians, businesspeople, even journalists. Then the analysts will fly home and write up a report. The dramatic moment where a country's rating is decided happens in a conference room.

Mr. MUKHERJI: We walk down this hallway and we come to this room. And, as you can see - I open the door here - it looks like any conference room anywhere in America. And the key feature here is the telephone, and that's important, because the rating committee is international.

KESTENBAUM: People sit down with their coffee or join by phone. They debate, run through the issues. And in the end, a country's rating is decided by what amounts to a show of hands by about five people.

Mr. MUKHERJI: We always want to have an odd number, 'cause we don't want a tie. You just, you know...

(Soundbite of laughter)

Mr. MUKHERJI: ...and do the whole thing again. End of the process. Okay, fine. No more questions. We know as much as we're going to know on this thing.

KESTENBAUM: How long does that take?

Mr. MUKHERJI: Even if you're doing a, like a Canada, which is relatively boring - rated triple A - you still have to go through all the steps. So two hours is sort of average. And then you have the vote: Analyst A, how do you vote? Analyst B? And you just go through the list, tally up the votes, and say okay, the majority voted for this. This is the rating.

KESTENBAUM: And this is the process that causes so much fuss. The reason: Letter grades by rating agencies - like S&P, Moody's and Fitch - they carry a special weight in the world.

S&P dropped Greece below a dreaded threshold, from Triple B-plus to Double B-plus, taking Greece out of the investment grade range and down into what the market calls junk status. And that actually matters. Some bond funds will only buy investment-grade bonds. Pension funds and banks - voluntarily, or by regulatory requirement - have similar restrictions on what they can buy.

So the criticism is that downgrading a country can help seal its fate, send it into a kind of death spiral.

Joydeep Mukherji doesn't buy that. When we rate a country, he says, we're just holding up a mirror to nature.

Mr. MUKHERJI: It's not the rating which caused the problem. The problem was there. The rating, as it changed, will bring the news out to more people.

KESTENBAUM: Is there a big deal when you cross from investment grade to non-investment grade because certain investors are constrained by laws?

Mr. MUKHERJI: Yes - simple answer.

(Soundbite of laughter)

KESTENBAUM: Okay. Do you treat that boundary as sort of special in your meetings because of that?

Mr. MUKHERJI: We think deeper and longer and harder about going across that line.

KESTENBAUM: And for all the controversy over Greece's Double B-plus rating, Double B countries mostly do okay. Historically, if you look three years out, fewer than five percent have actually ended up defaulting.

David Kestenbaum, NPR News.

MONTAGNE: And if you want to keep up on the economy, there's more from the Planet Money Team at our Web site: npr.org.

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