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Sovereign Credit Rating Agencies (SCRAs)

  • Context (TH | IE): India’s Chief Economic Advisor flagged the ‘opaque’ methodologies followed by the world’s top SCRAs.

Sovereign Credit Ratings (SCR)

  • SCR is an independent assessment of the creditworthiness of a country or sovereign entity.
  • SCRs can tell about the level of risk associated with investing in sovereign debt instruments.
  • Standard & Poor’s (S&P), Moody’s, and Fitch Ratings are the three most influential SCRAs.
  • Economic growth, fiscal policies, public debt levels, political stability, and external trade position are observed to assign an appropriate credit rating.
  • Importance: Better SCR can lead to cheaper governmental borrowings from the international bond market and increased FDI.
  • Creditworthiness is the ability to pay back debt without default.

Government bonds/Government securities(G-Sec)/Treasury bills

  • G-Secs are debt securities issued by a government to raise funds from the public or financial institutions.
  • In return, the government pays periodic interest payments (coupon payments).
  • On maturity, the government returns the initial amount (principal or face value).

Issues with SCRAs

  • Qualitative factors in rating methodologies give rise to bandwagon effects and cognitive biases.
  • It is alleged that countries’ ‘willingness to pay’ can manipulate the SCR.
  • Despite slowdowns, no fall in the ratings of developed economies seems discriminatory.
  • SCRAs use the World Bank’s Worldwide Governance Indicators, which have debatable observations.
  • The stagnant BBB- rating of India, despite improvement to being 5th largest economy, is a concern.

Way Forward

  • The Chief Economic Advisor of India recommended that the SCR model should include the debt repayment history of a country.
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