A Top Economist urges leaders of G20 countries to temporarily suspend ratings made by credit agencies, saying it is casting a shadow over the prospects of developing nations, including Ethiopia.
"If the G20 countries are serious about improving developing countries’ debt positions during the COVID-19 crisis, they should begin by supporting the temporary suspension of credit ratings," writes the Economist, Jayati Ghosh, who is also Executive Secretary of International Development Economics Associates.
Debt Service Suspension Initiative (DSSI) aims to provide immediate relief to low-income countries during the pandemic, while the Common Framework was designed to help debt-distressed sovereigns reschedule or reduce their liabilities, added the Professor of Economics at the University of Massachusetts Amherst in a commentary published on Project Syndicate on March 16, 2021.
"For many countries, it offers the best chance of making their debt burdens sustainable. But now, the threat of rating downgrades is casting a shadow over these countries’ prospects," she said.
Citing the case of Ethiopia, the Economist remarked the rating made by the three agencies, Fitch, Moody, and S & P Global Ratings, should not be considered by the G20 countries.
"Moody’s has concluded that the Ethiopian government’s commitment to engage with private creditors, as part of the G20 Common Framework for Debt Treatments beyond the DSSI, raises the risk that those creditors will incur losses. For that, the country apparently must be punished," Ghosh asserted.
These oligopolistic firms are market movers and makers, influencing financial portfolio allocations, the pricing of debt and other financial instruments, and the cost of capital, according to her.
"Bolstering their authority, the US Securities and Exchange Commission has recognized them as official statistical rating organizations. And many institutional investors, required by law to hold only “investment-grade” assets in their portfolios, must abide by the rating agencies’ verdicts," she added.
Ghosh concurred with the calls previously made by the UN Conference on Trade and Development, which has long argued that the world needs an independent public rating agency to conduct objective evaluations of the creditworthiness of sovereigns and companies.
"Such an agency is also necessary to assess the instruments used to finance new public investment, which will be in high demand in the coming years," she concluded.