By Devanshee Dave
Indian Prime Minister Narendra Modi, on Monday, staunchly pitched the vision of a new credit rating agency backed by all the BRICS (Brazil, Russia, India, China, and South Africa) nations in order to prevent the dictatorship of the three main U.S based credit rating agencies namely, Moody’s Analytics, Standards and Poor’s (S&P) and Fitch. The seeds of BRICS’ rating agency were planted in 2015’s BRICS summit in Ufa, being later affirmed in the BRICS summit organized in Goa last year.
Nations that have tried the concept of Creating Rating Agency
In the past, various countries have tried to set up their own rating agencies but none of them has achieved as much success as the U.S based agencies. For example, Credit Analysis and Research Limited (CARE) is doing well only in India. The Global Credit Ratings (GCR) of South Africa was inaugurated in 1993 but the ratings will start getting published only from 2017. MARK of Malaysia was established in 1996 but till this day covers only corporate ratings. Even Russia and China have initiated their own credit rating agencies, namely Analytical Credit Rating Agency (ACRA) and China Chengxin Credit Rating Group but have to drive a long way to be like those in the U.S.
The controversy involved in rating procedures
Bias in credit rating is not new as many times the ratings given by these agencies have caused disputes between the nations and the agencies. Recently in May, Moody’s Analytics slashed down the Chinese ratings from A1 to AA3, stating the reason as Chinese budget deficit, which is currently 3 percent of the GDP but by the end of this decade is likely to reach 45 percent of the GDP. As obvious, the Chinese government released a statement of displeasure saying, “Exaggerating difficulties facing the Chinese economy, and underestimating the Chinese government’s ability to deepen supply-side structural reform and appropriately expand aggregate demand.â€
The issue of India and Moody’s accrued last year when Moody’s gave India the rating of BAA3, the lowest grade for debt-considered investment. Moody’s scepticism for India was its debt burden and the banking sector. For the same, Arun Jaitley, the Finance Minister of India corresponded to Moody’s headquarters to get better rating position but failed in grasping one. There is also a controversy between the ratings being given to developed and developing nations.
The need of the new rating agency
The three main rating agencies are based in the U.S and are greatly influenced by the political conjecture—the best example being the credit rating of AAA given to the U.S at the time of mortgage crisis, which further contributed to the 2008 crisis. As a penalty for fraudulent ratings given at the time of the 2008 financial crisis, Moody’s, in January 2017, had to pay $864 million. Though S&P denied the claim, they agreed to pay the amount of $1.4 billion. This reflects a lack of authenticity and projects prejudiced ratings.
Another reason is the paying model used by these agencies. As of now, they are using Issuer Pay Model (IPM), where the fees earned by these agencies come from the issuer (the company or financial organization which is being rated) when the agencies provide them with the ratings. In return, those companies can sell their highly valued (in many cases, overvalued) financial products to investors. That itself questions the credibility of their ratings.
The BRICS agency
Narendra Modi, in the BRICS Summit, said, “Last year we discussed pooling our efforts to create a BRICS rating agency. An expert group has since been studying the viability of such an agency. I would urge that the road map for its creation should be finalized at the earliest.” As per an article on the Live Mint, the proposal for the rating agency was mentioned in the Goa Summit the last year and EXIM bank had prepared a concept paper for India. The rating agency, Crisil Ltd. had also formed a study for India to present in the Goa Summit.
The issue lies with the Chinese opposition of a BRICS agency as China believes a rating agency backed by the government will fail to hold credibility and thus BRICS should not get into this. When Narendra Modi visited Russian President Vladimir Putin in June this year for the 18th Indo-Russian Summit, both decided to work towards a credit rating agency without any political conjecture which would be backed by BRICS. Hence, China’s opposition may be defeated.
Obstacles to be experienced
There would be a few issues in the path of this new venture. The U.S agencies hold almost 90 percent of the total sovereign rating markets and that would create a tough task to convince the investors in the U.S and U.K. Also, if the new agency uses Investor Pay Model (IPM), in which investors pay to get ratings, it would be difficult for the global investors to adopt a new rating agency along with a new rating method. Thus, it can fail to attract investors, being labelled as inexperienced and proving credibility can take years.
Featured Image Source: Wikimedia
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