Seeking to lower excessively high borrowing costs thanks to the assessments of S&P Global Ratings, Fitch Ratings and Moody’s Investors Service, the group including Brazil, Russia, India, China and South Africa aim to create a competitor with a different fee structure.
The creation of a ratings company that doesn't rely on revenue from clients who want their debt assessed “is actively under discussion,” Yaduvendra Mathur, chairman and managing director of the Export-Import Bank of India, said in June last year.
According to Bloomberg, “The biggest hurdle for a Brics credit-assessment company would be convincing US and European investors the ratings are assigned without government pressure.
"Critics of S&P, Fitch and Moody’s say they are beholden to the companies they rate because their revenue comes from these clients.”
What is not being said or published by news agencies is that some rating agencies, like Standard & Poor's, have been sued for billions by various countries, including the US, Canada, Australia and many others. Most of these cases were settled by Standard & Poor.
Sello Rasethaba is chairperson of the Black Business Council serves on the Financial Services Working Group of the Brics Business Council. He recently wrote an opinion article investigating the rating agencies.
One of the “Big Three” global credit rating agencies - US-based Standard and Poor’s hosted “global credit conferences” in both Johannesburg and Cape Town with the theme, "What is in store for South Africa in 2017".
At these “conferences", S&P demonstrated some of the “other services” that they perform.
The Big Three global credit rating agencies - US-based Standard and Poor’s (S&P), Moody’s, and Fitch Ratings - have come under intense scrutiny in the wake of the global financial crisis.
Meant to provide investors with reliable information on the riskiness of various kinds of debt, these agencies have instead been accused of exacerbating the financial crisis and defrauding investors by offering overly favourable evaluations of insolvent financial institutions and approving extremely risky mortgage-related securities.
In 2009, President Obama released a proposals to reform credit rating agencies and, in particular, the “other services” considered key contributors to the financial crisis of 2008.
The proposal sought to limit conflicts of interest by barring rating firms from consulting with companies they rate and requiring corporations to disclose “pre-ratings” obtained from credit rating agencies before a rating firm is selected to conduct a rating.
As part of the approach, investors would have access to all the pre-ratings a corporation received for a particular security before a final rating firm is selected.
That seeks to eliminate the problem of “ratings shopping” in which a corporation solicits preliminary ratings from multiple agencies and only then pays for and discloses the highest rating it received.
The White House also proposed to have the Securities and Exchange Commission set up a special office to watch over rating agencies.
In Europe, the Big Three garnered further controversy over their sovereign debt ratings. While the public debt of crisis-hit countries like Greece, Portugal, and Ireland was relegated to “junk” status, the agencies also downgraded the creditworthiness of France, Austria, and other major eurozone economies.
EU officials argued that these moves accelerated the eurozone’s sovereign debt crisis, leading to calls for the creation of an independent European ratings agency.
At Brics, similar concerns were raised with regard to problems related to the “Big Three” Credit Rating Agencies. Brics countries have come up with the concept of an alternative credit rating agency (Brics RA). Brics RA first emerged during the 2015 Brics summit held in Ufa in Bashkortostan, Russia. Following the summit, the concept was deliberated upon by the Brics Business Council.
Read also: Fitch follows S&P, downgrades SA
In 2016, under India's chairmanship, the Exim Bank of India appointed Crisil Ltd (infrastructure advisory division), to develop a research paper studying the modalities of such an alternative rating agency. The key findings of the research paper have been deliberated upon by Brics leaders, financial market participants and regulators at various forums, including the Brics Summit held in Goa, India, in October 2016, wherein a need to take this concept forward was established. Under the guidance of the Goa Declaration by the Brics countries, an Expert Group has been constituted to examine the feasibility of setting up Brics RA on market-based principles.
The study conducted on behalf of the FSWG of the Brics Business Council noted that emerging economies have immense funding requirements, especially in core sectors such as infrastructure. Brics countries have announced significant commitment to infrastructure development. This immense requirement of funds cannot be met by banks and multilateral agencies alone. Robust capital markets are critical for financing growth and bond markets are a key component of that imperative.
The Brics Business Council concluded that Brics RA will aid the Brics nations’ efforts to raise funds for such development from capital markets and develop their bond markets.
The Brics RA will offer an emerging markets-focused credit evaluation framework that will enable investors to evaluate and compare the credit risk of projects across emerging markets, and hence optimise their investment decisions in these countries.
The Brics RA will have a methodology that will not only incorporate existing methodologies employed by the other rating agencies but also be more comprehensive, and will include insights based on its analysts’ experience and knowledge of Brics and emerging markets.
Global investors will be able to follow the rating scale offered by Brics rating agency to get a finer distinction of credit quality on a much wider list of companies, banks, insurance companies and government owned entities within the emerging market space.
This will enhance information availability of fixed income assets from these countries, thus providing issuers, investors and regulators a better appreciation of relevant risk factors and making the asset class a more attractive investment opportunity from a global perspective.
The need for a Brics Ratings Agency is accentuate by the following factors:
Sharper differentiation in credits across the emerging markets space is needed to facilitate flow of funds to these markets will enable cross-border funding within the Brics Countries.
Will add an emerging market lens in overall credit evaluation to facilitate flow of funds to these markets.
Will enable cross-border funding within the Brics countries.
Over time, the Brics RA will expand its operations to emerging markets outside of the Brics.
By facilitating inter-regional investments within the Brics nations, the Brics Rating agency will encourage the development of a common bond market for Brics which will benefit all members.