Sovereign credit ratings must be disrupted (Wired UK)

Wired Money 2014
Wired Money 2014Michael Newington Gray

The system for deciding nation credit ratings should
be transformed into a transparent and non-profit one that works for
the good of the public.

The Bertelsmann Foundation believes it has the answer to this.
Speaking at Wired Money
, its executive director Annette Heuser explained why overhauling the
current sovereign ratings system, currently dominated by just three
players (Standard & Poor’s, Moody’s and Fitch) will be
beneficial to everyone. Particularly when sovereign bonds
constitute almost $70 trillion of securities outstanding

Country credit ratings have perhaps never been as
important as in the past few years, during the financial crisis.
The rating is based upon a country’s ability to repay its debt, and
when one has its rating downgraded the cost of borrowing will go
up. Investors worldwide will use these ratings to decide where to
put their money. “This is why they are important. And why they can
also be a menace. This easily translates into slower economic
growth or higher taxes. And if it effects you and me it should be
clearly defined for the public good. It should be accessible,
transparent to us and at no cost.”

Right now, Heuser explained, the ratings system is
working at odds with the public interest. Few people know how the
rating is made, and having three companies dominate the process
produces an oligopoly. What’s worse, those three companies on top
have no incentive to improve the quality of its product, since they
make little money from it. Even so, countries still have to foot
the bill for the ratings process, so a bizarre conflict of interest
is introduced.

The Bertelsmann Foundation has, in the process of
attacking this problem, transformed itself into something of an
incubator for INCRA, the International Non-Profit Credit Rating
Agency. It wants to use this model, to disrupt the old

It will be non-profit, based on a sustainable
endowment, so countries will not have to pay for the service. “That
eliminates the traditional conflict of interest.”

There will be a stakeholders council, made up of key
actors from civil society, consumers and companies, and it will
have offices in Latin America and Asia as well as the US and North
America, to “give, in particular emerging economies, equal

Rather than the standard macroeconomic indicators,
INCRA has developed a new set of “forward-looking, highly
qualitative” indicators, that “mirror socioeconomic development of
a country”.

“If a government is willing to invest in education
and crisis management, we can assess if a country is willing to
plan and invest for its future in a rapidly changing world. That’s
an important indicator of whether a country is willing to repay its

Finally, the whole process would be totally

The system has been tested on the US, Germany, Japan
and Brazil, and the team is hopeful that if the need is there,
investors will help make the project a reality.

“Sovereign ratings must look like this very small
piece in a complex financial world — but it’s a very important one
that affects us all and should be truly defined as a public good.
INCRA has the potential to become the cornerstone of a new
financial system that is much more inclusive.”

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