Sovereign credit ratings are kind of like Consumer Reports for nations — just as people read car magazines or washing machine reviews before buying, investors read ratings to determine how to invest their money. Sovereign credit ratings assess a country’s debt and its ability and willingness to repay it. And whether citizens of a country realize it or not, a downgrading of even a single point can have serious ripple effects. If downgraded, a country has to pay more to borrow money on the international markets, meaning that much less is available for roads, schools, healthcare and other services.
On the TEDGlobal 2013 stage, rating agency reformer Annette Heuser suggests that sovereign credit ratings, because of their impact on the wider public, should actually be treated as public goods. She sounds a warning bell that these ratings are dominated by three players: Standard & Poor’s, Moody’s and Fitch Group. This raises three big issues:
- There’s little competition in the sector, and thus agencies have little incentive to improve.
- Countries are the customers of these agencies. They pay for their own ratings, and that creates a conflict of interest.
- There’s very little transparency, and we don’t know how exactly these companies formulate their ratings.
“We are allowing rating agencies to be intransparent about their work. We need to change this,” Heuser says. “The sector needs a complete overhaul, not just a trimming around the edges.”
Heuser’s solution: add a nonprofit to the mix. She proposes an international nonprofit credit rating agency, INCRA, that would be funded by a sustainable endowment, that would make its methodology transparent, that would make its ratings publicly available — and that would create competition in this sector to force improvement. Some key differences that INCRA would offer: It would avoid conflicts of interest through being an international agency, with emerging economies having an equal voice in decisions as established ones. And it would do its risk assessment based on forward-looking indicators — for example, looking at how countries are investing in education and renewable energy, as well as their ability to implement reforms during a crisis. High youth unemployment? Well, that would be factored in as a current problem as well as a future one, since it will have an effect on economy in coming years.
INCRA is currently testing its model, and Heuser is hopeful that it could be a game-changer.
“Sovereign rating may look like small piece of the global financial world, but I tell you it’s an important one to fix,” says Heuser. “We have the unique opportunity right now to turn INCRA into the cornerstone of a new inclusive financial system. We’ve left the major financial players alone for too long.”