Credit ratings: the Govt view
- The Finance Ministry recently released a document titled Re-examining Narratives: A Collection of Essays.
- Objective: To present alternative perspectives on key economic policy areas with long-term implications for India's growth and development.
The Document
- The first essay within the collection critiques the "opaque methodologies" used by global credit rating agencies in determining sovereign ratings.
- The Finance Ministry highlighted issues in the methodologies of major agencies, emphasizing their adverse impact on India.
Importance of Sovereign Ratings
- Sovereign ratings assess a government's creditworthiness, influencing global investors' decisions on lending money to a country.
- Lower ratings result in higher borrowing costs for governments and businesses alike, hindering economic development in developing countries like India.
Main Rating Agencies
- Sovereign credit ratings predate the Bretton Woods institutions, i.e. the World Bank and the International Monetary Fund.
- There three main globally recognised credit rating agencies are Moody’s, Standard & Poor’s and Fitch.
- The Finance Ministry's critique primarily focuses on Fitch, raising concerns about its assessment methodology.
Effect of Global Events
- While the US and European countries have enjoyed a good record, ratings have been affected by global events.
- For instance, according to an IMF research paper, sovereign defaults spiked during the 1930s Depression, and most ratings were downgraded.
- By 1939, all European sovereigns, barring the UK, were in the speculative grade.
Government's Criticism
- The Finance Ministry identifies three main concerns with the rating agencies' methodologies
- Opacity and Bias
- The agencies' methodologies are deemed opaque and biased against developing economies.
- There is a particular concern about their assessment of public sector-dominated banking sectors.
- Lack of Transparency in Expert Selection:
- The process of selecting experts for rating assessments lacks transparency, adding complexity to an already intricate methodology.
- Unclear Weight Assignments
- The agencies fail to clearly communicate the assigned weights for each parameter considered in their assessments.
- This further contributes to the lack of transparency.
- Opacity and Bias
- Critiques of Fitch's methodology
- Concerns related to the application of the composite governance indicator and the qualitative overlay, which introduces subjective elements.
Conclusion
- The Finance Ministry argues that the influence of subjective indicators and perceived institutional strength plays a disproportionate role in determining credit rating upgrades for developing economies.
- These assessments rely excessively on arbitrary indicators, and are often criticized for being based on perception-driven surveys.