Page 53 - Banking Finance January 2024

FEATURES

Credit ratings: The Govt view

T he Finance Ministry released a document titled Sovereign ratings matter not just for the government but
also for all businesses in that country. That's because the
Re-examining Narratives: A Collection of Essays,
government is considered to be the safest bet in a country.
which Chief Economic Advisor V Anantha
Nageswaran said was an "attempt to present
businesses of that country end up working out an even higher
alternate perspectives on diverse areas of economic policy If the sovereign rating of a country's government is low, the
that have long-term implications for India's growth and interest rate when they borrow from global investors.
development priorities".
Most developing countries (such as India), while rich in either
The first of the five essays in the document is a criticism of labour resources or land or mineral resources, suffer from a
what the government calls the "opaque methodologies lack of capital (money available to put to use). In the absence
adopted by credit rating agencies to arrive at sovereign of financial resources, developing countries struggle to make
ratings". the best use of their natural strengths. A poor sovereign
rating can inhibit the ability of these countries to borrow
The essay seeks to flag issues with the methodology adopted money from rich investors - just as a good rating can make
by the three main global credit rating agencies, and to show, it easier to become more productive and remove mass
based on calculations by the Finance Ministry, how these poverty.
gaps affect India adversely.
Which are the main rating agencies?
Why do sovereign ratings matter? Sovereign credit ratings predate the Bretton Woods

Sovereign ratings are about the credit worthiness of institutions, i.e., the World Bank and the International
governments. They provide a marker for investors around Monetary Fund. There are three main globally recognised
the world about the ability and willingness of governments credit rating agencies: Moody's, Standard & poor's and
to payback debt. Just as an individual's credit rating is critical Fitch.
to whether she gets a loan and at what interest rate,
sovereign ratings affect a country's ability to borrow money Moody's is the oldest; it was established in 1900 and issued
from global investors. its first sovereign ratings just before World War I. In the
1920s, Poor's Publishing and Standard Statistics, the
Again, just as an individual or corporate borrower with a predecessor of S&P, started rating government bonds.
well documented history of paying back loans (showing
willingness to pay back) and substantial assets or income While the US and European countries have enjoyed a good
streams (showing ability to pay back) gets a new loan (for a record, ratings have been affected by global events. For
car/ house/ factory) at a cheaper interest rate than instance, according to an IMF research paper, sovereign
someone with no credit history or assured income streams defaults spiked during the 1930s Depression, and most
or assets, governments with lower sovereign ratings have ratings were downgraded. By 1939, all European sovereigns,
to pay higher interest rates when they borrow. barring the UK, were in the speculative grade.

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