Rating method needs reform: Finance ministry paper – Times of India

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New Delhi: Ref Ambiguity In the classification system of international agencies viz Moody’s, Fitch And Standard and Poor’s, a paper by officers of the Finance Ministry’s economic division, called for reforms in the mechanism for developing countries, which suffer negative consequences.
“Reforms in the credit rating process are the need of the hour. As the rating authority is bound to be fully transparent, harmonization of responsibilities ensures that rating agencies make their processes transparent and Avoid unworkable decisions… Reforming sovereign ratings This process will accurately reflect the default risk of developing economies, saving them billions in funding costs.
The concerns that were flagged were on three counts. One, they were not only called vague, but developing countries were labeled backward. Pointing to Fitch’s methodology, the paper said foreign ownership of banks was assigned too much weight, which overlooked the developmental role played by state-owned enterprises.

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Two, it said the experts were chosen in a non-transparent manner in consultation with the agencies, adding “another layer of ambiguity to an already difficult-to-interpret procedure”.
Third, government economists have argued that there was a lack of clarity about the weights assigned to each parameter.
“Obscurity and Non-transparency There are fertile grounds for doubting the discriminatory intent of CRAs in the rating methodology, especially when the downgrades are mostly with respect to economically weaker nations… In developing countries a There is a strong sense that subjective assessments are often skewed in favor. Among advanced economies, as developing countries suffered more than 95 percent of all credit rating downgrades despite experiencing economic contractions that were milder than their advanced economy counterparts.”
Between 2020 and 2022, more than 56 percent of African countries will be rated by at least one of the three major agencies, compared with 9 percent of European countries. Similarly, negative warning announcements such as reviews, watches and outlooks were associated with increased borrowing costs for developing countries.
A review of the authorities’ credit rating methodology revealed that there was considerable reliance on qualitative variables to derive ‘willingness to pay’. “The prominent presence of qualitative factors in the credit rating methodology also gives rise to bandwagon effects and cognitive biases that have been reflected substantially in various studies, raising concerns about the credibility of credit ratings.”

Business news,Standard and Poor,Classification method,Ambiguity,Non-transparency,Moody’s,Fitch
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