Credit rating agencies are being blamed to the recent market crises, but there have been indications of the crash for some time.

Though ill-judged lending in the US sub-prime market may have been the catalyst for the liquidity crisis that has undermined global debt markets, it is the credit rating agencies that are taking most of the flak.

Every market crisis needs a scapegoat. When the dot-com bubble burst, investor and political ire focused on stock analysts who were accused of talking up technology stocks and IPOs.

This time around, the giant credit rating agencies are the target. But what substance, if any, is there to the attacks?

"Ratings agencies have certainly got it wrong in some cases and to varying degrees, but not as much as people say," said one Irish market insider. "Anyone who buys assets or lends money just by looking at ratings is someone who is not paying proper attention. Credit ratings are an aid to, not a substitute for, independent decision making."

European commissioner Charlie McCreevy has been warning about heightened global financial risks for some time and, as far back as last October, voiced market concerns about credit rating agencies.

Speaking to the Irish Association of Corporate Treasurers, he said: "it may only be when the credit cycle takes a sharp turn for the worse that financial market participants and credit rating agencies will be able to convincingly demonstrate that they have not, in respect of any part of their activities, been swimming naked, but have been adequately measuring the scale and extent of the risks associated with financial innovation and the new structured products that have proliferated in recent years - so many of which have been sold as rated securities".

He warned that "the more opaque the transfer and derivative instruments become, the more risk there is that risk is not being properly managed or measured".

Noel O'Halloran, chief investment officer at KBC Asset Management in Dublin agrees. "What is at issue here are certain vehicles backed in part by sub-prime mortgage debt and, in those cases, it is fair to say that ratings agencies have been a contributor to the current problems."

However, he notes that the fundamental issue remains poor underwriting and lending standards by the original issuers of the mortgage debt. He also points to the influence of the rapid growth of securitisation in the past decade.

"Previously, if a mortgage went sour, it impacted directly on the issuer. Now these loans are sold on to banks which then package them with other types of debt. These products are then rated and sold on to other banks or investment vehicles," says O'Halloran, acknowledging that, with the risk spread more widely, there was always the possibility of some lenders being less vigilant in their approach.

Increasing competition in a low interest rate environment has also seen banks looking further afield for income and relying more on fee income than on the more traditional revenue stream of interest income.

A brief look at the accounts of ratings giants Standard & Poor's and Moody's over recent years shows the extent to which structured finance - an area that includes resident mortgage-backed securities which lie at the heart of the current liquidity crisis - has become an important revenue stream for these groups. The banks that structure the products being rated are similarly generating a growing portion of their income from such operations.

And the potential for conflict of interest in this area appears to be the most significant concern across the spectrum. "In the old days, ratings agencies made their money from the people who bought the rating that they issued on a particular product and, in my view, that is a much better process," says one business insider.

"Now you have a situation where an agency might make between $300,000 and $400,000 from the group seeking the rating for a product and only a fraction of that from actually selling the rating information."

In a speech last week to the European Parliament, McCreevy focused on this concern over the potential conflict of interest.

"On the one hand, they act as advisors to banks on how to structure their offerings to get the best mix of ratings. On the other, credit rating agencies provide ratings that are widely relied upon by investors.

"It has been alleged that there was unwarranted rating inflation for structured products," added McCreevy.

"The role of credit rating agencies needs to be clearer. What they do. What they don't. The extent to which they can be relied upon. The extent to which they can't."

The reluctance of anyone in the Irish market to comment openly for this article is, in itself, a comment on the close relationship between credit rating agencies and the debt issuers. The credit rating agencies might be on the defensive, but they claim their role is simply misunderstood.

Standard & Poor's, which along with Fitch, has now been subpoenaed by New York attorney general Andrew Cuomo, states: "A credit rating is an opinion about the probability of a security or debt issuer defaulting.

"It is not a form of investment advice and does not address market valuation of a bond," he says.

That may be the view of the ratings agencies, but it is equally true that the market prices these debt instruments largely on the basis of the rating they have secured from the likes of Standard & Poor's, Moody's, Fitch or DBRS. "The simple question in people's minds is how, if you bundle a lot of less appealing debt in a structured vehicle, do you get a better rating than if it was sold separately?" says O'Halloran.

The nature of the debt is that sub-prime mortgages should never be getting high investment grade ratings, he suggests.

"It is true that sub-prime mortgage debt has itself been tiered depending on the origin of the debt. You have subsequently got Tier 1 sub-prime; it's something of an oxymoron, but that is how it was validated."

Standard & Poor's insists that it has been expressing concern about the weakened sub-prime bond market for two years and has taken action over that time.

The clamour for increased oversight or regulation has met a predictably cool response within the financial services industry. "The first question you need to ask is whether it would achieve anything," said one insider. "Rating agencies are already complicated, bureaucratic and convoluted enough. More oversight will not automatically make the situation better. Instead, it runs the risk of imposing just one more layer of bureaucracy," he said, citing the imposition of the increasingly unpopular Sarbanes-Oxley act in the wake of the Enron debacle.

Some even point to the existing market regulator in the United States, the Securities and Exchange Commission (SEC), as part of the problem. They argue that Standard & Poor's and Moody's have become so powerful precisely because the SEC only recognises a few ratings agencies. Recognising a broader group might help to bring the ratings of each into a more proper perspective, they say.

There is a concern, however, that the focus on the ratings agencies - several of which have very deep pockets - has more to do with disillusioned investors looking for someone from whom they can seek restitution in the courts than any egregious or fraudulent behaviour. "When things go wrong, everyone looks for someone to blame," said one industry source. Market sentiment is currently so delicate that, even though concern surrounds only a fraction of all the ratings issued by the agencies, the entire way they operate has now come under the microscope.

One inevitable longer-term outcome, O'Halloran suggests, is that the value of "AAA" ratings will be undermined in the eyes of investors.

And that could prove a costly experience for those trying to issue and market the bewildering array of complex debt instruments.