The Real Non-Tariff Barrier Called CRA

The current model of sovereign credit rating has outlived its utility and is not in step with present global economic realities

- Deep Narayan Mukherjee

The sovereign ratings that the big three (S&P, Moody's, Fitch) credit rating agencies (CRA) assign a country impact its access to and cost of borrowing in international markets. We discuss whether the methodology used by them is defensible, objective, and unbiased.

But first a story on the sovereign rating trajectory of Greece and India. Currently, both are rated BBB-, which is the lowest investment grade. Between 1994 and 2003, CRAs gave a massive six-notch upgrade to Greece, moving it from BBB- to A+. Crisis struck Greece in 2008 and thereafter, it missed debt payment in 2012. Bailouts did not help. Greece defaulted to the International Monetary Fund (IMF) in 2015. Its rating was lowered to C. Yet, after 2016, its rating bounced up by seven notches and landed at investment grade BBB- with a positive outlook by 2023.

In 2000, India was rated BB. Then, in 2005, CRA upgraded India to BB+, and finally, in the 2006-07 period, to BBB-, where it has remained ever since. Independent India has never defaulted. It last went to the IMF in 1991 but repaid its debt early. The Asian financial crisis in 1999 and the global financial crisis in 2008 did not impact India. In 2012, with a minor hiccup in its economy, S&P immediately gave a negative rating outlook to its BBB- rating, and only in 2024 has given a positive outlook.

If we compare the macroeconomic parameters of India with Greece it reveals the following.