Study Reveals More Evidence of a “One Rule for One, One Rule for Another” Approach to Credit Ratings

Our friends at CountryRisk, via their Chief Economist Moritz Kraemer, have recently published a study that examines the rating actions of the leading credit rating agencies since the onset of the COVID-19 pandemic. Perhaps unsurprisingly, the results show a marked bias towards the developed world and against the developing world.

 

The issue of the rating agencies reacting more harshly to the world’s poorest countries has been examined on a number of occasions in the credit rating literature (see here, here, and here) so it comes as no surprise to hear that the existence of this bias during the COVID-19 crisis is of interest to onlookers, and it is indeed very welcomed. The study, which can be found here, and was picked up by Reuters and dissected here. It aimed to compare how the Big Three rating agencies (S&P, Moody’s, and Fitch) have reacted to the crisis and how their decisions have played out in relation to the world’s poorest and richest countries. It finds that, as an oligopoly, the three downgraded a fifth of countries they rate. Furthermore, it found that 48 countries had had their sovereign ratings cut by at least one agency, with more than half of the 48 experiencing more than one downgrade. However, the richest countries that the agencies rate witnessed ‘hardly any despite a far bigger rise in debt levels’. Interestingly, Fitch was the most active ‘downgrader’ within the group, and it downgraded some of the richest countries – Canada, Italy, the U.K., Slovakia, and Hong Kong – whilst Moody’s only downgraded the U.K. according to the study. However, S&P, the largest agency by market capitalisation, did not downgrade any developed economies, although it did place some on negative watch. S&P were not so trigger-shy in Sub-Saharan Africa, where it cut half of the countries it rates in the region. Overall, ‘poorer countries have borne the brunt of cuts. Just over 40% of Sub-Saharan African countries suffered at least one downgrade… while 35% did in Latin America and the Caribbean’. The study concludes with a damning remark that puts this issue into perspective: ‘it is not at all clear why rich countries’ ratings remained largely untouched even as their poorer peers were subject to more extensive downgrades’.

 

We have looked at this issue before, and there is no one pinpointed reason for this bias. One could argue a lack of relationship between the rating analysts and the countries, or one could argue that the poorer countries just are not trusted by analysts, full stop. One could also argue that this all plays very much into a larger and more historical narrative of bias towards said countries. Irrespective of a defining reason, the impact remains the same and this is precisely why there needs to be a new resolution moving forward. The chances of this pandemic being a turning-point in global finance are extraordinarily low as we all surely know, but the opportunity exists to change at least some practices because this bias, as identified by the study, is not a natural phenomenon. It is one that needs to be considered and acted upon, first by onlookers and those interested and specialised in this area – as the report has done – but then by the entities that can change this process: multilateral organisations, the credit rating agencies, investors, and the countries themselves. It is just not sustainable as it currently sits and only a collaborative way forward can be truly sustainable. Whether there is an appetite for true collaboration – and not something one can advertise whilst engaging in age-old practices – remains to be seen.

 

Keywords – credit rating agencies, bias, developed world, developing world, @finregmatters