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.