IOSCO Publishes Report on the Effect of Covid Economic Support on Credit Ratings

The Board of the International Organisation of Securities Commissions (IOSCO) recently published a report regarding the effect on the credit ratings of the Big Three credit rating agencies (S&P, Moody’s, and Fitch) of the use of ‘Government Support Measures’ (GSM) relating to the Covid-19 pandemic. Interestingly, IOSCO combed public information and also liaised with the credit rating agencies themselves to study the methodological changes, and also the real effect changes to the ratings produced since the onset of the pandemic. The result is not really surprising, but there is a clear warning from the credit rating agencies, via IOSCO and this report, that the withdrawal of GSM across the board needs to be very gradual indeed.

 

The report, available here, contains the review of ratings from the Big Three in a variety of categories, ranging from structured finance ratings to sovereign ratings. IOSCO start by stating that ‘the analysis includes a review of any changes made to the methodologies, their application to rating actions taken during the timeframe of the pandemic, as well as implications of the withdrawal of GSMs on credit ratings and methodologies’. Rightly, the report follows with ‘the pandemic’s economic and market turmoil led to many credit rating downgrades and has put credit rating agencies and their credit ratings into greater regulatory, industry and media focus’. The credit rating agencies, since the pandemic started, have produced more than 20,000 ratings between them, which has been identified as being proportionally higher than the previous 3-year range. This is not surprising of course, given the environment we inhabit at the moment, but the question is how have the agencies responded to this unique environment?

 


The report found that the agencies did consider the usage of GSMs heavily, suggesting that ‘GSMs have a significant role in alleviating the downward pressure on credit ratings’. However, there were issues with regards to the transparency surrounding these ratings – as if often the case with the leading credit rating agencies – because, as the report states, ‘the review observed no material changes to CRA methodologies. However, according to CRAs, certain assumptions or stress scenarios used in assessing credit ratings were updated to reflect the change in the macro-economic outlook. CRAs explained that the methodologies are sufficiently flexible in their application to account for a variety of economic shocks and scenarios’. This may well be the case, but a. this is all on the CRAs word, without evidence, and without anything that can be measured – how are ‘assumptions’ measured? Also, can the rating agencies pre-pandemic methodologies really be so flexible to account for a global pandemic? It is questionable, and these issues are the ones continually highlighted by the critics of the rating agencies.

 

Ultimately, the Report concludes that the credit rating agencies view the usage and continuation of GSMs as positive, particularly in the developed world. However, in both the developed and developing worlds, the process of GSMs must be reduced gradually because not doing so could be regarded negatively by the agencies – this is particularly important for developing countries, the credit rating agencies say. This makes sense, of course, because the need to return to pre-pandemic economic levels needs to be balanced with the level of GSM utilised by governments. What IOSCO do not question is the assumptive quality of the credit ratings themselves. They do finish by suggesting that ‘the impact of GSMs on credit ratings should continue to be monitored through regular supervisory channels’, but that is all. Again, the official viewpoint is that the rating agencies will be free to determine what is material, and when. Perhaps that is not the role of the regulators – which may well be the case – but the conclusion has to be that the economic arena is subject to the credit rating agencies’ assumptions. This is a vitally important understanding, and one the global regulators always need to consider.

 

Keywords – credit ratings, ISOCO, @finregmatters 

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