Credit Rating Agencies and International Finance Capital – Veeraiah Konduri

The reentry of Mr. P. Chidambaram, in to the North Block building that homes the Ministry of Finance, has to acknowledge a strange welcome from international rating agency, Moody’s Analytics. In its recent assessment on India titling “ India Outlook : Below the Potential “ lowered the GDP forecast for the FY 2012-13 to 5.5 % from its previous assessment of June 2012 where it expected the GDP growth rate for India will be 6.5 – 7 % with a warning “ The impacts of “The impact of lower growth and still-high inflation will deteriorate credit metrics in the near term, but not to the extent that they will become incompatible with India’s current rating”. This will be a steep 1 percent cut in the forecast which will have its consequences on the investment bodies, both domestic and foreign. During the month of June 2012, another credit rating agency Standard & Poor, commented, “(Brazil, Russia, India could be the first among the so-called BRIC India, China) nations to have its investment-grade rating lowered to junk status because of slower growth, ballooning deficits and political roadblocks to economic policymaking.”

Immediately, with guns in hand to fire from the shoulders of computed statistics, started asking the governments to remove the policy obstacles that are hindering the nation from obtaining the investment grades. It is interesting to know the probable causes in the view of so called rating agencies for giving negative rankings. With the slightly differences on the stress here and there, the argument of rating agencies runs like this.India’s fiscal deficit is beyond the international standards, subsidies are high, inflation is peaking through the roof, no credible steps to reduce the subsidies, inability to open the sectors for more FDI, like the ongoing FDI in retail controversy,  policy paralysis, policy under achievement, lack of reforms in labor laws etc. Similar to the Time magazine cover story, the Moody’s report titled “ India Outlook : Below the Potential” refers to more expectations fromIndiapolicy establishment. Who wants all these to be met as per the prescriptions ? To elicit answer to this question, first we need to know for whom exactly the rating ranks will be useful.

Credit rating agencies are primary tools of international finance capital and became essential part of the financial landscape. They used to provide expert opinion in terms of assessing the credit risk for those who are seeking loans. Over the period of time, they are entrenched in to the system of credit market so much that unless the borrower or recipient has a credit rating tag, the lenders and investors won’t come forward to invest in that particular country. Basing on the rating tags, the investors and lenders used to determine their rates of return. Over a period of time, “these private rating agencies assessments, which are designed for private financial markets” have been inserted in to public domain. According to Finance & Development magazine of IMF ( Rating Games – March 2012), these agencies changed the nature of banking regulation from reliance on static, fixed percentages to use of dynamic scores that can change according to assessment of risk. This also resulted in greater sophistication as well as complexity. Secondly, which has more important policy implications, it led to the entrenchment of private entities in to regulation of financial markets and entities.

What they do ?

Globalisation has changed the international financial landscape dramatically. Till the advent of globalization, liberalization in 80s, the sources of credit and consumers of credit are primarily centered in sovereign nations. The domestic savings and government bonds used to be the primary sources of domestic capital formation. Internationally interconnected financial, credit, consumer markets are one important feature of the financial globalization. This lead to the accessibility of credit market beyond the boarders became a practicality. Thus the regularly floating, fluctuating international finance capital needs certain ground level information basing on which the IFC designs certain structures to be followed by the recipient countries in order to protect the interests of IFC. Mobilising such an information became all the more important task. These so called credit rating agencies are supposed to supply such information which will be factored-in while designing the investment policies and choosing the investment destinations. For this, the rating agencies should get accessibility to the bank portfolios and this access was facilitated through the Basel II accord.  For tThis exercise reached to such a stage that the international watchdogs such as IMF and World Banks started ranking the countries according to the ability to attract the international finance capital. In a sense, as rightly felt by Panayotis Garvas ( Finance & Development, March 2012) “ using of such ratings in the financial regulation amounts both to – privatization of regulatory process – inherently a government responsibility – and to abdication by the government of one of its key duties in order to obtain purported benefits.” These ratings impacts the markets, affects the value of assets and thus capital requirements. The crux lies in here.

When a country is being downgraded, that gives dual benefits for international finance capital. These dual benefit are in fact collateral advantages for international finance capital. As the world economy is depressed, the so called credit market in the West collapsed, the international finance capital is looking for alternative avenues to invest its profits stashed away from the world markets. In that process, these ratings will be act as coercive instruments in prize opening up of capital markets in other countries. These opening up of capital markets happens at two stages. First through direct investments in certain profitable sectors and secondly through the investments in stock markets and commodity exchanges. That is why opening up of new sectors, such as civil aviation, retail for foreign direct investment became a hot topic and all the neoliberal intellectuals are bating against those who are opposing entry FDI in retail as enemies of growth. Because of political nuances, the ruling UPA II is unable to give a final goahead for FDI in retail, reason behind branding the government affected by policy paralysis, and PM as underachiever. Secondly, As per the market practice, markets reacts to the rating tags. For example, in June, when the Standard & Poor, downgradedIndia, the Bombay Stock Exchange reacted negatively and lost the market value of shares meaning that the assets of the companies listed in BSE lost their worth. This gives an opportunity for the international finance capital to buy (in the official parlance, investing through instruments like FIIs, Portfolio investments, FDIs) the assets of Indian companies at a much lower price than the actual. Thus in effect the credit rating agencies are working at the behest of international finance capital and advancing the interests of the same hence not serving the larger good as neoliberal advocates asks us to believe.

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  1. mvs koteswarao says:

    this article is highly informative. hope it reaches more readers. however, the role played by international bankers in the era of globalization, was effectively played by IMF. SO AN ANALYSIS OF THIS NATURE MAY BEGIN WITH THE ROLE OF IMF AND CONSEQUENCES OF IMF SPONSORED LOANS. HOWEVER, THIS IS ONE OF THE BEST PIECES ON THE TOPIC. HOPE THE AUTHOR WILL CONTINUE THE EFFORT

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