Developing countries rebel against the credit-rating agencies

EARLIER this year, a crowd of patriotic Indian students bristled when Arvind Subramanian, the government’s chief economic adviser, showed them a slide with two charts. One showed India’s steady economic growth and flat debt-GDP ratio; the other China’s slowing growth and fast-rising debt. Yet India’s credit rating from S&P Global Ratings (formerly Standard and Poor’s), has been stuck at BBB-. China, on the other hand, was upgraded from A+ to AA- in 2010 even as its debt shot up. The slide was pithily titled “Poor Standards”.

Rating government debt is always controversial. And India v China is often a grudge match. But many emerging-market governments agree with Mr Subramanian, who has contrasted the rating agencies’ treatment of India with that of the rich world in the 2008 crisis, when they “closed the stable doors after the horses bolted”.

In frustration, the BRICS grouping—Brazil, Russia, India, China and South Africa—plans to set up an “independent” ratings agency, expected to be launched at their summit this September in Xiamen in southern China. Even the host country, initially cautious about the idea, may become keener since Moody’s, another ratings agency, downgraded its debt in May. At the time, China Daily, a state outlet, attacked Moody’s “subjective analysis”.

Emerging-market governments argue that their debt is downgraded more often than that of rich countries. South Africa’s debt was demoted to “junk” in April, when Jacob Zuma, the president, fired the finance minister, Pravin Gordhan. So was Turkey’s, after a failed coup last year, and Brazil’s as a corruption scandal worsened in 2015. Leah Traub of Lord Abbett, a fund manager, reckons the agencies are quicker than before to react to political events in such economies. According to Bloomberg, in 2016 three agencies took a record 1,971 negative actions on the debt of emerging-market government and related entities.

Some think the agencies have become trigger-happy, and may themselves raise the risk of a crisis. That criticism is not new. In a paper published in 1999 on the “procyclical role of rating agencies”, Giovanni Ferri, Liu Ligang and Joseph Stiglitz, three economists, looked at the Asian financial crisis in 1997 (see Free exchange). They argued that, in its initial phases, the ratings agencies fostered panic and contagion.

A World Bank study last year, on the ratings of 20 developing countries between 1998 and 2015, found that a downgrade to junk raised the yield on a country’s short-term bonds by an average of 1.38 percentage points. A junk rating forces some institutional investors to sell because of internal rules or regulatory requirements. The sovereign bond also usually sets a floor for the cost of borrowing by domestic firms, since their debt is hardly ever rated higher than their governments’.

Rich-country borrowing costs, in contrast, often survive radical shocks. That is especially true of the United States, where sovereign-bond yields actually tend to fall during a crisis, because its stable institutions, deep markets and the dollar’s reserve-currency status make it a safe haven. Even when S&P Global, in a rare move, did downgrade the sovereign rating from AAA to AA+ in 2011, Treasury yields actually dipped. In Britain, too, after the Brexit vote last year, government-bond yields initially fell as investors fled riskier assets.

Ratings agencies argue that rich countries have a “100-year track record”. Such appeals to history fuel the developing countries’ perception that the markets are stacked against them. And that a BRICS ratings agency would probably not be considered credible by many investors will only heighten their sense of unfairness.