The battle between the credit rating agencies has started. S&P announced yesterday that it might downgrade Moody's short-term credit rating (currently A-1), because the introduction of the reform of the American financial system is likely to result in increased risks for Moody's business.

According to S&P, the new legislation could increase the number of claims against the agencies on the part of investors. In fact, investors could bring proceedings against an agency if they could prove that it was careless with its investigation before giving a credit-rating. That could increase the cost of litigation for Moody's.

S&P also points out that if the final legislation includes provision to abolish the obligation for a company to obtain a credit rating from a recognised agency (namely Fitch, Moody's or S&P), demand could decrease significantly.

These criteria could equally well be applied to S&P, and Moody's shouldn't waste any time in retaliating by downgrading its rival. In fact, the two amendments adopted in May in the context of the draft law to regulate finance do not augur well for credit rating agencies, which were severely criticised after the crisis for having badly assessed the risks attached to some securities.