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1Credit Rating Agencies and developing economies

I. Introduction The21stcenturyhasbeencharacterizedbyarelativescarcityofsovereigndefaultsandmajorrestructurings,withnotableexceptionslikeGreeceandArgentina.Waveafterwaveofmonetarylooseningmayhavehelpedtokeepfinancingconditionseasyandglobalinvestorsonanincreasinglydesperatelookoutforyield.Alltoooftentheyfoundthatyieldinemerginganddevelopingcountries(EMDEs),severalofthemtappinginternationalcapitalmarketsforthefirsttime,especiallyacrosstheAfricancontinent.ThepandemicinducedglobaleconomiccrisishasputthatperiodofEMDEfundingintoquestion.Privatecapitalflowsintothepoorestcountriesdroppedsharply.InSub-SaharanAfrica,onlythemostcreditworthycountriescancurrentlyaccessthemarket.Long-termUS-Treasuryrateshavenowbeguntoinchup,makingthemostlyUSD-denominateddebtoffrontiermarketsrelativelylessattractive.InAfrica,2021ischaracterizedbyrelativelyfewprincipalrepayments.Butthatwillchangesignificantlyin2022andbeyond.Theriskofsovereigndebtrestructuringsseemslikelytorise.There-emergenceofdefaultriskhasdirectedattentiontotheinstitutionsthataretaskedwithpredictinganddeclaringdefaults:theinternationalcreditratingagencies(CRAs),especiallythe“Big3”(S&PGlobal,Moody’sandFitch).Asfarasdevelopingeconomiesareconcerned,theratingagencieshavegainedimportancecomparedtopreviouscyclesofsovereigndebtcrises,suchastheonesweepingacrossLatinAmericainthe1980s.Backthenonlyasmallnumberofsovereignsevenhadasovereignratingatall.InSub-SaharanAfrica,forexample,onlySouthAfricahadaratingatthebeginningofthecentury.TheCRAsrolehasexpandedsignificantlysince.Ratingagenciesderivetheirratingsapplyingpublishedmethodologies.Whilethemethodologies,aswellastheratingsdifferbetweenthethreeagenciesthemainbuildingblocksarethesame.Theyconsistofananalysisof(i)institutionalandgovernancequality;(ii)economicgrowthandresilience;(iii)publicfinances;(iv)externalaccounts;and(v)monetaryflexibility.Theagenciestypicallycreateindicative“anchorscores”foreachofthefiveratingfactorsandthenapplya“qualitative”overlay.Thecreditcommitteecanadjusttheindicativescoresupordown.Therating,whichisalwaysdeterminedbyagroupofanalystsinacreditcommitteeisthereforeamixofobjectivequantitativeandsubjectivequalitativefactors.

1ThisPolicyNotedrawsonaforthcomingpaperwrittenbyStephanyGriffith-JonesandMoritzKraemer,titled“CreditRatingAgenciesandDevelopingCountries;analysisoftheissuesandpolicysuggestions”,writtenforUNDESA.

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Ratingagenciesusecomparableratingscaleswith20rungsfromthehighest(AAA)tothelowest(D),withtheuppertenratings(AAAtoBBB-)beingreferredtoasinvestmentgrade,andthelowerhalf(startingfromBB+)asnon-investmentgrade,orspeculativegrade.Thesimilarityoftheratingsmethodologiesappliedhasledtoacomparabilityofoutcomes,especiallyforemergingmarkets.Therewillalwaysberatingsdifferencesfromonecountrytoanother,butonaveragetheagenciesagree.Theaverageratingofthe70EMDEsratedbyeachoftheBig3onJanuary31,2020,beforethepandemicspreadacrosstheglobewasalmostidenticalforthethreefirms,justbelowBBinthenon-investmentgraderange.Oneyearintothepandemic,theaverageEMratinghasfallenbyalittlelessthanone-halfofanotch,againuniformlyacrosstheagencies.ThehistoricallyobservedpatternofS&Pdowngradingfirstandtheothertwoagenciesfollowing,seemstohavebeenbroken.2Theagenciesnowappeartomoveinlockstep.InsectionII,whichfollows,wewillanalyzethemainchallengesposedbycreditratingagencies,especiallyfromadevelopingandemergingeconomiesperspective.SectionIIIwillexplorepossiblepolicysolutionstothosechallenges.

II. Challenges 1.) Potential bias against EEDEs

Mostofthetimes,ratingsmovegentlyupordownataglacialpace,attimesbrieflyinterruptedbydebtcrisis,eitherinoneorafewcountries,orinmoregeneralizeddebtandfinancialcrises.Ratingagenciesstrivetorate“throughthecycle”,thoughthereisacademicandotherdebateatwhethertheyaresuccessfulinthis(seebelow).Thismeans,thatmostratingschangerelativelyrarely,exceptinmajorcrises,astheyaredesignedtoreflectfundamentalcreditstrengthsandnottheupsanddownsofthecredit,financial,orcommoditymarkets.Therefore,itisusuallydifficulttoassess,whetherratingagenciesfavoronesetofsovereignsoveranother.Todate,however,thefactualevidenceonthishasbeeninconclusive.WepresentsomenewevidencethatmightsupporttheclaimthatCRAshaveaninherentbiasagainstEEDEs.TheCOVID-19crisishasallthehallmarksofapotentialexceptiontothetypicalgradualism:aglobaleconomicshock,thathitsallcountriesonallcontinentssimultaneously,althoughatdifferentintensities.Lookingatthissuddenandbrutalshockwecanassesswhetherratingagenciesdisplaythebiasagainstemerginganddevelopingeconomies.TheeconomicfalloutfromthepandemichasbeenlargerforAEsthanforEMDEs:AccordingtoIMFOctober2020-estimatesAEeconomiescontractedtwiceasfast

2Foranin-depthlead-laganalysisofsovereignratingsseeKraemeretal.(2020)

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(-4.9%)asEMDEs(-2.4%)lastyear.Similarly,theaggregateAEgovernmentdebtratioincreasedby20percentagepointsto124%ofGDP,versusEMDE’sincreasebyninepercentagepointsto61%ofGDP.Notwithstandingthatbiggershock,betweenJan.31,2020andFeb.28,2021,AEsaccountedforonlysixnotchesofdowngradesbetweentheBig3,against125inEMDEs(seeChart1).Inotherwords,althoughAEsaccountfor29%ofallissuerratingsoftheBig3,lessthan5%ofalldowngradeswereappliedtothem.Ifupgradesduringtheperiodunderinvestigationareincludedinthecount,the“netdowngrades”disappearaltogether.S&PandMoody’sevenhadnetpositive(!)ratingactionsforAEsduringthemostferociouspeacetimerecessioninlivingmemory.

TowardsEMDEs,theratingagenciespandemicresponsehasbeenlesscharitable.Chart2displaystheshareofeachagency’sportfolioofratedsovereignsthatwasdowngradedbyatleastonenotch.SovereignsinSub-SaharanAfrica(41%)andLatinAmericaandtheCaribbean(35%)weremostlikelytobedowngraded,followedbyMiddleEast,NorthAfrica,andCentralAsia(25%)andAsia-Pacific(24%).Non-AECentralandEasternEurope(CEE)includesseveraleconomies,especiallytheEUmembersthatareclosetobeingconsideredAEs.Somearelong-standingmembersoftheOECD.LikeAEs,theCEE

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region,too,wasalmostentirelyspared:Moody’sloweredTurkey’sratingandFitchdowngradedArmenia.S&Ptooknoactionintheregion.Amongthethreemainplayers,Fitchwasthemostsevereagencyalmosteverywhere,especiallyintheMiddleEastandNorthAfricaregion.S&Pwastheratingsfirmofferingmostforbearanceinallworldregions,exceptinSub-SaharanAfrica,whereitwasthedowngradeleaderbysomedistance,loweringtheratingsof50%ofsovereignsintheregion.Whatexplainstheseinter-regionaldifferences,andespeciallytheratingsstabilityofadvancedeconomies?Onecouldarguethatrich,diversifiedcountriesaremoreresilienttoshocksthanpoorer,morevulnerableeconomies.Thatisundoubtedlytrue.However,itisalsotruethattheshockdeliveredbyCOVID-19wasnotevenlydistributedacrosseconomies.Infact,thehittogrowthandpublicdebtaccumulationhasbeentwiceaslargeforAEsthanforEMDEs,nottomentiontheirsignificantlylargerdeathtolls.Giventhatcontext,itisnotatallclearwhyrichcountries’ratingsremainedlargelyuntouchedevenastheirpoorerpeersweresubjecttomoreextensivedowngrades.Moreanalysisisrequiredtosolvethispuzzle.ThesemoreextensivedowngradesintheEMDEs,especiallyifnotjustifiedfromaneconomicpointofview,canhavenegativeconsequencesontheavailabilityandcostofprivatecapitalflows,andthereforelevelsofinvestment,ofthosecountries,withnegativeeffectsontheirdevelopmentprospects,aswellastheirabilitytomeettheSDGs.

2.) Pro-cyclicality of ratings3

Oneofthekeypurposesofcreditratingagencies(CRAs)istoprovideaccurateanalysisofcountries’long-termsolvency,inwaysthatdonotvarythroughthecycleorevenbetterthatarecounter-cyclical.Thiswouldcontributetomakeinternationalprivatecapitalflows,whichthemselvesareinherentlypro-cyclicallessso.However,concernshavebeenexpressedbybothemerginganddevelopingcountriesthemselves,aswellasevidenceprovidedintheacademicliteraturethatCRAsarethemselvespro-cyclical,andthereforecontributetomakeprivatecapitalflowsMOREandNOTLESSpro-cyclical,thuspossiblyincreasingtheriskoffinancialcrisesoccurringanddeepening.Thus,forexample,Ferri,G.,L.-G.LuiandJ.E.Stiglitz(1999),basedontheireconometricanalysis,concludedthatcreditratingagenciesaggravatedtheEastAsiancrisisbydowngradingmorethanneeded,whichthenincreasedthecostsofborrowingforcountries,afterfailingtopredictthecrisis.Ratingsinthatcasecontributedtocreateaself-fulfillingprophecy.

3WearegratefultoSabrinaAxterforhervaluablecontributiontothissection

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Indeed,Ferri,LuiandStiglitz,(op.cit.)arguethatbeforetheEastAsiancrisis,theactualratingsassignedtothefourhighgrowthdynamicEastAsianeconomieswereconsistentlyhigherthantheeconomicfundamentalswarranted.Secondly,afterthecrisis,actualratingsdroppedfarmoresharplythantheeconomicfundamentals,asmeasuredbypaperwriters’modelpredicted,suggestingthatratingdowngradeswerelargerthaneconomicfundamentalspredicted.Thiswouldseemtoimplythatbothintimesofboomandcrisis,economicfundamentalsarenotsufficientlyconsideredbyCRAs.TheaboveauthorsaswellasothersemphasizetheroleofprofitandincentivesofCRAsthemselvesinshapingtheirpro-cyclicalbehavior.Thus,CRAsmightbedriventobemoreconservativeduringcrisistoprotecttheirreputationcapital,whichhasbeenunderminedbythecrisis,andarelessconcernedabouttheirreputationcapitalduringeconomicboomandthusmaybemorelenientintheirratingassignments.Bolton,FreixasandShapiro(2012)complementthisbyarguingthatCRAscaninflateratingswheninvestorsbecomemoretrustingandtherearemoreinvestorswillingtoinvestduringboomcyclesand/orwhenCRAreputationcostsarelower.Goodhart(2008)goesfurtherandismorepessimisticashearguesthatproposalstoaddresspro-cyclicalitybymakingcreditratingsonathrough-the-cyclebasiswillnotdomuchsinceduringboomyearsitismorebeneficialforallactorstoadoptapoint-in-timeapproachandcompetitionwillmakethathappen.Interestingly,bothheandBoltonetalareskepticalofthebenefitsofincreasedcompetition,contrarytootheropinion.Ferri,LuiandStiglitz(opcit.),alsosuggesthowCRAscanintroducepro-cyclicalratings:“Iftheratingsgeneratedfromthepaper’sauthorsmodelofeconomicfundamentalsareconsistentlyhigher(orlower)thantheactualratingsassignedforacountry,thentheratingsassignedfromthequalitativejudgementparttendtoundermine(oroverstate)theratingsgeneratedbytheeconomicfundamentalsand,thus,theyclearlyindicatethatratingagenciestendtousetheiridiosyncraticjudgementtomodifytheratingsgeneratedbytheeconomicfundamentals.Indoingso,ratingagenciesmaybehaveinamannerthatmaypotentiallygeneratepro-cyclicalsovereignratings”(347).AnotherimportantpointmadebytheaboveauthorsisthatdowngradesbyCRAs,especiallyifsevere,giveanegativesignalonthecountrythatisexperiencingthedowngradingtomarketparticipants,whichcanalsoaffecttheexchangerate,thestockmarketandthevalueofotherdomesticassetsandthuscanturnintoself-fulfillingprophecy.ItisinterestingthatIMF(2000),alsobasedonempiricalanalysis,basedontheirownmodel,concludesimilarlythat“CRAbehaviorisasymmetricandyield“proofofthepuddingintheeatingresults”:countriesaredowngradedfollowingmajorcrises,possiblybecausetheydonotperformasexpected”.Therefore,thispaperalsoisconcernedaboutCRApro-cyclicalbehavior,andmakessomeinterestingsuggestionsforalternatives,whichwediscussbelow.PretoriusandBotha(2017)carryoutempiricalresearchfor27Africancountriesforthetimeperiodbetween2007and2014.Theyconcludethat:“pro-cyclicality

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isconfirmedforFitchandMoody’sintheirassignmentofcreditratingsforAfricansovereigns.ThismeansthatthereisanincreasedprobabilitytoAfricansovereignsofgettingupgradedduringboomphasesanddowngradedduringrecessionphasesbythementionedratingagencies”(546).TheiranalysisofS&Pdidnotgiveclearpro-cyclicalresultsfortheirratings,whichisinterestinginthatthereseemtobedifferentbehavioralpatternsforthedifferentCRAs.BrotoandMolina(2016)notonlyfindevidenceofpro-cyclicalitybutalsofindthatpreviousdowngradeshaveanegativeinfluenceonfutureratingsandthatitisdifficultfordomesticvariablestoaffectthepathofratingsifacountryhasbeendowngraded.Thus,theyconcludethatratingsare“lessinfluencedbyeconomicanddomesticindicatorsinthepost-crisisperiodthaninthepre-crisisperiod”.Thislatterpointmeansthatthetaskforthecountries’policy-makerspost-crisisbecomesharder,especiallyindifficulttimes.Thereareadditionallyseveralotherstudiesthathavereportedthereispro-cyclicalityinratingsofsovereigns,suchasLarrain,ReisenandVonMaltzen(1997)andMasciandaro(2011),whereastherearealsosome,butfewerstudiesthathavenotfoundevidenceofsuchpro-cyclicality,suchasKraemer(2014)andMora(2006),forexample.Inconclusion,mostoftheliteratureprovidesfairlystrongevidencethatCRAstendtobepro-cyclical,thattheirincentivestructureencouragestheirpro-cyclicalityandthatthequalitativeaspectsoftheirriskevaluationseemtobeparticularlypro-cyclical.Wereturntothelatterissueinourproposals.

3.) Governance issues and conflicts in sovereign ratings

Itisimportanttounderstandthattheagenciesaresubjecttoregulationsthattrytoinsulateanalystsdecidingontheratingfromanypressureofcommercialcolleaguesoriginatingbusinessandmanagingclientrelationships.Itappearsthatratingagenciesadheretothosestandardsandthe“Chinesewalls”haveheldupsincetheglobalfinancialcrisis.Atleastthatiswhatthelackofanyviolationspublicizedbyregulatorsseemstosuggest.Evenassumingtheintentofinappropriatebehavior,attemptingtosystematicallyletcommercialinterestdiluteanalyticalindependencewouldputthelucrativebusinessmodelatgraverisk.Ifregulatorsweretoexposesuchmisconduct,thereputationaldamagewouldjustbetoohigh.CRAsfearan“ArthurAndersen”-momentmorethananythingelse.Buttherecanbemoresubtlewaysthatcouldallowapro-AEbiastricklein.The“Big3”areUS-headquartered,profit-maximizingfirms,largelyfundedbytheinstitutionstheyrate.Andtheratingsbusinessisextraordinarilyprofitable.Profitmarginshavesteadilyincreasedandreached60%in2020forMoody’sandS&P,bothpubliclylistedcompanies.Itislittlesurprising,then,thattheirsharepriceshaveaccordinglyrisenbetween3.5-fold(Moody’s)and5-fold(S&P),frompre-GFCpeaks,makingtheirgroupparentcompaniesvaluedat$55billionand$85billion,respectively.Theoligopolisticmarketstructure,wherethreefirmsaccountforover90%ofthemarket,(seechart3below)issomethingtheincumbentswouldliketopreserve.

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Mostoftheirbusinessisinadvancedeconomies(AEs).RegulatorsinAEsarethemostpowerfulsupervisorsoverseeingtheratingsindustry.ItisinAEs,therefore,wherethemainriskstotheCRA’sbusinessmodelsreside.Forexample,S&P,hadbeensuedbytheU.S.DepartmentofJusticein2013.Althoughsovereignratingswerenottheunderlyingreasonforthecasebroughtagainstit,S&Psaidatthetimeitconsideredthelawsuitas“retaliation”forhavingstrippedtheUSofits‘AAA’-ratingtwoyearsearlier.Thecaseendedwitha$1.5billionsettlementin2015,wipingoutoveroneyearofprofits.NoagencyhassincedowngradedtheUS,notwithstandingthesignificantdeteriorationinpublicfinancesandunprecedentedthreatstogovernancestandardsduringtheincumbencyofthe45thPOTUS.Thereisthereforeanasymmetryofincentivesanddisincentives,asregardswillingnessofCRAStodowngradeAEs,versustheEMDEs,whoseregulatorshavefarless,ifanyinfluenceontheCRAsdecisions.Additionally,mostratingsmanagersandanalystsarecitizensofadvancedeconomies.Andamongthefewwhoarenot,mostofthoseobtainedtheirtertiaryeducationatWesternuniversities.ThishasgivenrisetosuspicionofAnglo-Saxongroupthinkand“homebias”ofCRAs,discriminatinginfavorofAEstothedetrimentofpoorercountries.Or,asGhana’sMinisterofFinance,KenOforo-Atta,moredramaticallyputsit:“AretheratingagenciesbeginningtotipourworldintothefirstcircleofDante’sInferno?”Asoutlinedabove,sovereignratingsareamixtureofobjectivedataanalysisandsubjectivereasoning.Ifanalystsfeelsomepressure,howeversubtle,fromexecutiveswhoaimforeverfasterbusinessexpansion,theymightsubconsciouslybeinclinedtogiveAEsthebenefitofthedoubtintheirqualitativeassessment.Remote,smallerandlesspowerfulnationsmightwellhavebeendowngradedinsimilarcircumstances.CRAmanagementhasofcoursealsotheabilitytopromoteanalystswithareputationfor“generous”ratingrecommendationsincommerciallykeycountriesandblockthepathaheadfor

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35

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10

40

33

18

9

MarketshareasestimatedbyEU-regulator(2013and2019in%)

S&P

Moody's

Fitch

Allothers

innerring: 2013outerring:2019

Source:EuropeanSecuritiesandMarketAuthority

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theirmoreskepticalcolleagues.Suchpatternswillnotescapetheattentionofanalyticalstaffwithprofessionalambitions.Thequalityandimpartialityofratingsrequireanunshakableindependenceofanalystsfromallcommercialconsiderationsorfromfearofcareerrepercussions.Theremayalsobefurtherpersonalconsiderationsofpressuresfromoutsidetheratingsorganization:theknowledgethatratinganalystsofseveralagenciesweretried(andonlyaftermanyyearsacquitted)inanItaliancriminalcourtforratingdowngradesperformedduringtheeurozonecrisismayhaveledsomeanalyststothinktwiceaboutloweringrichcountries’sovereignratings.EMDEgovernmentsandregulatorsdonotdisposeofsimilarpowers.

4.) Credit ratings and climate risk

AkeyissueisthetimehorizonofsovereignratingsissuedbyCRAs,asthesearerelativelyshort.Thereseemstobeacaseformorelong-termratingstobeissued,alsotomirrorthelengtheningtenorsofgovernmentsecurities(whichhaveevenforsomeemergingeconomiesincluded100-yearbonds)andtotakeaccountoflonger-termfactorsespeciallyclimatechange,butalsodemographicandotherlong-termtrends.ItseemsespeciallyimportantthatCRAsconsiderclimaterisk,includingbothphysicalandtransitionrisk,indeterminingratings.AfailuretocutcarbonemissionscouldcostgovernmentsaroundtheworldhundredsofbillionsofUS$,accordingtoUniversityofCambridgeeconomistswhousedartificialintelligencetoforecastclimatechange’seffectonsovereigncreditratings.Theyestimatethatifemissionscontinueatcurrentlevels,63countrieswillseeratingsdowngradesofmorethanonenotchby2030,andmanymoreduringtherestofthecentury.Importantly,thisfindingappliesforadvancedeconomiesandEMDEsequally.4Thiswouldalsoimplyratingagenciesreflectingsovereigneffortstoincreaseinvestmentinresilienceandadaptationtoclimatechange,whichcouldbepositiveforsomedevelopingandemergingeconomies.Indeed,failingtoinvestinmakingeconomiesandsocietiesmoreclimate-resilientunderminesfuturegrowth,wellbeing,andsovereigncreditworthiness.Suchanapproachcouldleadtodownwardratingpressureforsomesovereigns,whileothersmightbenefit.Forexample,ratingsforsomedevelopingandemergingcountriescouldbelowered,iftheyareparticularlyvulnerabletoclimatechange,orarefossilproducers,andtheirproductionandexportscouldincreasinglybecomestrandedassetsinfutureyears.Nevertheless,ifratingagenciesaretohavealong-termperspective,suchrisksoughttobeincludedmoreexplicitlyinratings.

4https://www.bennettinstitute.cam.ac.uk/media/uploads/files/Rising_Climate_Falling_Ratings_Working_Paper.pdf

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Inthecaseparticularlyofmajorfossilproducers(seeIEA,2020),butalsoofothercountries,effortsat,andinvestmentin,significantdiversificationofproductiontomorelow-carbonactivities,-bothfordomesticconsumptionandespeciallyforexports-,wouldreducetheproblemofstrandedassets,andshouldthusincreasetheirlong–termcreditratings.Morebroadly,majorinvestmentsmadebydevelopingcountriescontributingtomoredynamic,sustainable,andfairereconomies,andwhichhelpfulfilltheSDGs,shouldbeconsideredpositivelybyratingagencies,astheyarelikelytoincreasecountry’sabilityforfuturerepayment.Indeed,forexample,investmentineducation,healthandsustainableinfrastructure,mayintheshort-termincreaselevelsofpublicdebt,butinthelong-term,ifwellinvested,especiallyinsectorswhichdirectlyorindirectlywillincreasethecapacityoftheeconomytogrow,includingparticularlyintradeables,willthusmakeitmorelikelycountrieswillbeableandwillingtoservicefuturedebt.Animportantexampleoftheimportanceofthelinkbetweensufficientinvestmentinhealthandpandemicpreventionwitheconomicperformanceisprovidedbyinvestment(orlackof)inpandemicpreparationandits’impactoneconomicevolutioninCOVID-19times.ItseemsthatthosecountrieswithbetterresourcedhealthsystemsaswellasbetterpandemicpreparationandresponsehavebeenabletocontroltheCOVIDpandemicbetterandhavethereforeseentheireconomieslessbadlyhit.Thisillustratesthevalueofinvestmentinthesocialsectorsonlong-termevolutionofeconomies.

Indeed,astheUNSecretaryGeneralPolicyBrief(2021)arguesclearly, ,“a more favorable long-term rating might help countries raise long-term capital to invest more effectively in sustainable development”. The availability of ultra long-term ratings, would not just allow a better evaluation of countries ability to service the debt in the long-term, but help enable, in a virtuous circle, higher availability of funds to do such key investment. ItneedstobeconsideredwhetherCRAsshouldalsodosuchultra-long-termratings,orwhetherotherinstitutions,withgreaterfocusandexpertiseonlong-termtrends,wouldbemoreappropriateforthattask.Wereturntotheseissuesbelow(sectionIII.5).

5.) Impact of credit ratings in the DSSI/Common framework context

ShortlyaftertheoutbreakoftheCOVID-19pandemictheG20putinplacetheDebtServiceSuspensionInitiative(DSSI),comingintoeffectinMay2020.UndertheDSSI73oftheworld’spoorestcountriescanapplyfortemporarydebt-servicepaymentrelief(butnotforgiveness)fromitsofficialbilateralcreditors.Thesuspensionistoexpirebymid-2021butmaybeextendedagain.Todate,46countrieshaverequestedDSSIparticipation.Sincecreditratingsspeakonlytomissedpaymentsonnon-officialdebt(e.g.,bondsandcommercialloans),suspendingdebtservicepaymentsisnotadefault.Missingapaymentincommercialdebtwouldbe.TheG20hasencouragedprivatecreditorstoparticipateintheDSSI.Unsurprisingly,eligiblecountrieshavenotrequested

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equaltreatmentfrombondholders,asdebtservicesuspensiononthosesecuritieswillconstituteadefaultundertheratingagencies’definitions.AlthoughmostDSSI-eligiblecountrieshavelostmarketaccessforoveroneyearnow,anyway,thefearofdowngradesstillloomslarge.RatingagencieshavebeencriticizedforsignalingthatratingsparticipatinginDSSIcouldcomeunderdownwardpressure,asparticipationcouldraisetheriskoflossesforinvestorsinthefuture.Infact,therehavenotbeenthatmanyratingactionsexplicitlyreferencingDSSIparticipation.Thiscanbeexplainedbythefactthatpoorcountrieshavemostlyrefrainedfromsolicitingprivatecreditorinvolvement.Forexample,Moody’sputseveralEMDEswithoutstandingEurobondsonreviewforadowngradeonMay28,2020,citingtheG20’scallforprivatesectorinvolvement.Allratings(Pakistan,Coted’Ivoire,Cameroon,Senegal,Ethiopia)werelateraffirmedratherthandowngraded.Moody’shadconcludedthatprivatesectorinvolvementwassufficientlylowsoasnotmeritingadowngrade.Itremainsunclear,however,whyarrivingatthisconclusionwouldhavetakensolongandwhatchangedtheirmind.Bydanglingthe“threat”ofadowngradeinfrontofEMDE’sissuers,Moody’scanbeseenashavingcreatedunnecessarynoiseandfosteringasenseofreluctancetoapplytomechanismdesignedtomakecountries’debtanddebtservicemoresustainable,whichwouldbeimportantforfacilitatingCOVID-19recovery.Ethiopia’sratinghassincebeenloweredanyway,alsobytheotheragencies.ThishasoccurredinthecontextofEthiopiarequesting“treatment”ofitspublicdebtundertheG20CommonFramework(CF).UndertheFramework,whichwasagreedinNovember2020,DSSIeligiblecountriescanrequestamoreprofoundrestructuringofthedebt:debtreductionratherthannet-presentvalueneutralandselectivere-profiling.AconditionforparticipationintheCFis“broadcreditorparticipationincludingtheprivatesector”.ByapplyingforCFdebttreatment,Ethiopiahasthussignaledthatitiswillingtoapproachitsprivatecreditorsfordebtrestructuring.Although,thatrestructuringhasnotyethappened,andmaybeneverwill,ithasobjectivelybecomemorelikely.Andasratingsareverynarrowlydefinedasanassessmentofalikelihoodofdefault(andnothingelse),itishardtofaulttheagenciesoncuttingEthiopia’srating.Distresseddebtrestructuringisadefaultbycapitalmarketconvention.Evenifratingagencieswouldviolatetheircriteriaandnotdeclareadefault,itispossiblethatinvestorswouldbehaveasiftheyhad.Adebtdefaultisahighlyvisibleandwell-understoodeventandwhetheraratingagencycallsitassuchornotmaynotmakeaverylargematerialdifferencetomarketconditions,thoughsomeacademicliteratureprovidesevidencethatdowngradeannouncementsdohaveanimpact,andmaycontributetodeepeningcrisesforexample.ButitremainstruethatgovernmentsinDSSI-eligiblecountriesremainfearfulofthedowngradesthatwillhavetocomeiftheyaskfordebtrenegotiation.Theyshouldnotbe.Proactivelyrestructuringthedebt,evenifitledtoatemporarydeclarationofdefaultbytheagencies,canbebeneficialforhighlyindebted

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governments.Asexcessleverageisremoved,thegrowthanddevelopmentpotentialwillimprove.Thatshouldmakepoorcountries’sovereigndebtmoreattractiveinvestmentsagain.Inalow-interestworldwhereinvestorsfranticallysearchforyield,adebtwork-outwillquicklyrestoremarketaccess,whichiscurrentlyclosedformostpoorersovereigns.Evenmoresoasinvestors(andratingagencies)willunderstandthattherestructuringwouldnotbetheresultofpoorpolicies,butbadluck,beinghitbyapandemicandglobaleconomiccrisis.Someinvestorsstokethefearofrestructuringandallegedlossofprolongedmarketaccessoutofperceivedself-interest.Butitmaybeanactofself-harminstead:Weknowfromexperiencethatdelaystosovereignrestructuringleadstodeepercrisesindebtorcountries,deeperhaircutsforcreditors,andlongerexclusionfromcapitalmarkets.Procrastinationisalose-loseproposition.

6.) Role of Credit Ratings in financial market regulation

TheratingsbyCRAShaveabroaderindirectimpact,thantheonetheyhavedirectlyonthevolumeandcostofcredit.ThisindirecteffectrelatestotheuseofCRAratingsinseveralaspectsoffinancialregulation.Themostimportantone,whichwewillfocusonhere,istheuseofratingsaspartoftheBasleCapitalAccord,whichregulatesbanklending,nationallyandinternationally;thisisespeciallyimportantfortheirlendingtoemerginganddevelopingeconomies(EEDEs).Therearealsootherregulations,includinginternalones,which,forexample,determineinvestmentpoliciesofinstitutionalinvestors-increasinglyimportantintheirinvestingandlendingtoemerginganddevelopingeconomies,whichwewilldiscussbelow.Afterthe2007/09majorfinancialcrisis,regulatorsagreedthattheuseofCRAratingsinregulationswasnegativebecauseitmade-forexample-theBasleAccordmorepro-cyclicalandthereforecontributedtodeepenthecrisis,andthatthislinkshouldbeeliminatedorreduced;however,unfortunately,thishasnotoccurredtodate.Inbroadterms,thisuseofCRAratingsinBaselregulationisproblematicforthreereasons(Becker,2021).First,theBasleCommitteeforBankSupervision(BCBS)externalizedsub-issues,suchascreditriskmeasurement,thatareoffunctionalimportanceforitsobjectiveofglobalbankingstability.Second,itestablishedaone-sideddependenceonexternalforumssincetheperformanceofbankingregulationisdependentoncreditriskmeasurementbutnotviceversa.Third,theBCBShaslimitedcontrolmechanismstoinfluencegovernanceintheCRAs,leavingthemautonomyforinconsideratebehavior.BaselIIandIIIincludeaweightingsystemthatallowschangeinriskassessment.Thisdynamicriskweightingsystemrequiresconstantupdatesaboutthecurrentprobabilityofdefault(PD)andotherriskparametersofeachfinancialassetinthebank’spossession.SuchdetailedandregularupdatingrequiresspecializedknowledgeandconsiderablecapabilitiesthatlieoutsidetheBCBS’competenceasaperiodiccommitteewithlittleresources.Thelackofcapacitiestogovern

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riskassessmentitselfcausedtheBCBStohandtheresponsibilityoverthisimportantsub-issuetoCRAs.Thus,theapproach“outsources”theactualassessmentofriskweightsofborrowerstoCRAs.TheseassessmentscanchangeovertimeandaresubjecttotheevaluationoftheCRAs.Hence,theBaselCommitteedecidedtousetheexpertiseofCRAsasprovidersforprobabilityofdefaultestimatesinthestandardizedapproach,whilenotprescribinganydetailedmethodologicalmeansonhowCRAshavetorateassets.TheAccordonlyspecifiessoftcriteriaofwhatpropertiesaCRAmustfulfilltoreceivealicense.Thus,theAccordgaveCRAsmuchdiscretionintheirratingsystem.Akeyproblemisthatwiththis,amultiplicativeaspectisthatBaselIIandIIInotonlyexposedthevalueoffinancialassetstomarketdevelopments,butalsotherelatedriskweights.UnderformerBaselIrules,thepro-cyclicalinfluenceoffairvalueaccountingwerelimitedtotheactualvalueoftheassets,buttheriskweightswerefixedandriskassessmentwouldnothavechangedwiththebusinesscycle.However,theintroductionofdynamicriskweightsandtheimportofriskassessmentfromCRAsinthestandardizedapproachconnectedthepro-cyclicalnatureofbothpolicies,therebymultiplyingtheirpro-cyclicality.Creditratingagencieswereshowninabadlightduringthecreditcrisisof2008/09,mainlyduetoratingsonsecuritizeddebt.However,BaselIIIhasnotoutlawedtheuseofcreditratings.BaselCommitteehadtwoconsultationsforrevisingthecreditriskframework.Inthefirstconsultation,theytriedtodoawaywithcreditratingsforrisk-weightingbutlaterbacktrackedfromtheidea.Inthe2ndconsultationtheyhavegiventheoptionofassigningriskweightsbasedoneithercreditratingsorotherfactorsdependinguponwhetherthejurisdictionallowsuseofcreditratings.Butthatdoesnotstopcertainjurisdictionstonotallowuseofcreditratingsforriskweightingpurpose.Forexample,intheUSyoucannotuseexternalcreditratingsforriskweightingofassets.IntheEU,youcanuseexternalcreditratingstodetermineriskweights,butonlyfromratingagenciesapprovedbyESMAandmeetingcertainstandards(Li,2021).Ratingsandratingchangescancontainvaluablesignalsforitsusers,suchasinvestors.Somesignalsaremuchmorepowerfulthanother.Downgradesofratingsalongtheratingsscalereflecttheassessmentonincrementallyincreasingcreditrisk.Historically,ratingdowngradesatthetopofthescaleincreasedefaultrisklessthanatthelowerendofthespectrum(ofcourse,theoppositeappliesforupgrades).Butthereisnoempiricallydiscerniblecliff,wheredefaultprobabilitieswouldsuddenlychange.Itisasmoothgraduation.Unfortunately,thatisnothowthecapitalmarketsworkandreflectthoseratings.Investorsgenerallysubdividetheratingspectrumintoinvestmentgrade(BBB-orabove)andspeculative(ornon-investmentgrade,BB+orbelow)issuersandinstruments.Avastbodyofinvestmentguidelines,suchasofinstitutional

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investorstypicallyareforbiddentoinvestinnon-investmentgradepaper,andofficialregulation,suchastheBaselCapitalAccordfocusesonthisartificialdivide.Bydoingsoacliffeffectisintroduced.Bylosinginvestmentgradestatus,anissuermayfaceawaveofforcedsellingasinvestmentmandatesofmanyassetmanagersandfundsonlyallowforinvestmentin“investmentgrade”.Thiscanleadtodisruption,financialdistressand,intheworstcase,toself-fulfillingpropheciesofadowngradeacrosstheinvestmentgradedivide.Suchamovecanleadtorefinancingproblemsandweakercreditfundamentals,whichinturnwouldcallforfurtherdowngrades,therebyincreasingdifficultiesforcountriestorecover.Theinvestmentmandatesandregulationsarewrittenbyinstitutionalinvestorsandregulators,notbyratingagencies.Buttheagenciesarefullycognizantofthecliffeffectandthatknowledgecaninfluencetheirdecision-making.Acreditcommitteewillbemoreinclinedtogivemorebenefitofthedoubtbeforedowngradinganissuerto“junk”(asnon-investmentgradeissometimesreferredto)thanatanyotherofthetwentypossiblelocationoftheratingscale(withthepossibleexceptionwhenitcomestotheiconiclossoftop-notchAAA).Itknowsthattheimplicationscouldbesevere.Therefore,itmayprefertowaitandhopethatsomegoodnewsmayshowupthatwillmakethedowngradeunnecessary.Suchhesitancytocrossthedividebluntstheratingssignalandcandilutethequalityandobjectivityoftherating,aswellaspotentiallypromotingpro-cyclicalityoftheratings.Ratingstransitiondatareleasedbytheagenciesdemonstratethatthereisconsiderable“stickiness”attheinvestmentgradedivideforcorporateratings.Thismeansthattherearefewer“crossings”fromtheBBBratingscategoryintotheBBcategorythanwhatcouldbeexpectedwhenobservingcategorycrossingselsewhereontheratingsscale.Giventhesmalleruniversetherearefarfewerobservationsonsovereignratingchanges.Nevertheless,Chartxxxshowsthatonecanalsoobservesomestickiness,althoughlesspronouncedthanwhenratingcorporates.ThedatareferstoS&Ponly,whichhasbeenthefirstmoverwhenloweringsovereignsacrosstheinvestmentgradedividein80%ofthecases(2000-2019).Whilecomparabledataisnotreadilyavailable,thesovereign“stickiness”attheinvestmentgradecliffcouldbemorepronouncedforotheragencies.

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III. Policy Recommendations 1) Refocus regulatory scrutiny

Regulatorsneedtosharpentheirview.Theregulationoftheratingsindustryhastightenedsignificantly,atleastintheformalsenseintheaftermathoftheglobalfinancialcrisisandthewidelyshareddiscontentabouttheroleplayedbythecreditratingagencies,especiallyinthefieldofratingsub-primemortgagesegment.IntheEU,apan-Europeanregulationandregulator(ESMA)wasintroducedforthefirsttime.Agencieshavebeefeduptheirinternalrulesandcomplianceandqualitycontrolfunctions.Regulatoryfinesbecauseofbreachofregulationsorpoorlymanagedconflictsofinteresthavebeenfewandfarbetween.Inlinewiththeirmandates,regulatorshavebeenfocusingmoreontheformoftheratingsprocessthanonthesubstanceofdecisions.Agencieshaveprovendiligenttoadheretoallformalrulesofengagement,satisfyingregulators.Butasoutlinedabovetheremaybemoresubtlewaysinwhichconflictsofinterestcouldmanifestthemselvesandlead,e.g.,toananalyticallydiscriminatorypracticefavoringtheeconomieswhereagenciesreapmostoftheirprofits.Regulatorsdonotassessthoserisks.Andsinceregulatorsareagentsofadvancedeconomies’governments,theymightbeconflictedthemselvesifaskedtoensurecomparabilityofanalyticaltreatment.ThefactthatthechairoftheEUwatchdoghasreportedlycautionedratingagenciesagainst“quick-firedowngrades”ofsovereignscanberegardedasareflectionofthisinherentconflict,exacerbatingaprivilegedtreatmentofadvancedeconomies.Aglobal“super-regulator”ofCRAswouldbebestplacedtoaddresssuchissues.Theglobalregulator,whereEMDEswouldbeadequatelyrepresented,would

13.1

11.6

13.5

11.4

6.9

11.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

A BBB BB

Stickinessattheinvestmentgradedivide

Sovereigns

Corporates

Shareofissuersdowngradedinto thenextlowercategoryin3years(S&P,1975-2019).

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complementtheactivitiesofnationalregulators.Itshouldbespecificallytaskedwithensuringglobalcompatibilityofratings.Itcouldrequireratingagenciestodisclosemoreinformationonhowdecisionshavebeenmade,includingmoremeaningfulminutesofcommittees.Rightnow,thereisacompleteregulatoryvoidtothatregard.Also,theglobalregulatorshouldberequestedtoassesstheadequacyofthequantityandprofessionalqualityofanalyticalstaff.Thisisacomplexundertaking,astheassessmentof“professionalskills”istoalargedegreeasubjectiveone.Butthisisnotthecaseentirely.Theregulatorshouldbeabletotrackmetricsofanalysts’objectiveprofessionalexperience(degrees,yearsofexperience,diversityofexperience)andcareerprogress.Thisshouldcontributetodiscouragingratingsfirmsfrompickingandpromotingwhattheyconsidermoremalleableanalysts.Thequantitymeasureofstaffisimportantasanalyticaloverstretchofanalystsmakesmistakesmorelikely,whichisanotherlessonfromthesubprimecrisis,butalsointhecaseofsovereignratings.

2.) Reducing dependency on credit ratings in regulation

IMF(opcit.)whenstudyingempiricallyhowratingagenciesrespondtoacrisis,concludethatratingagenciesdonotquiteseethroughacrisis.Ratingagencies,moreover,reactstrongerwhenthecrisisisdeeper,andexceedsaminimumthreshold.Onecouldargue,asIMF(opcit.)doesthatbankcapitalrequirementsshouldinsteadbecountercyclical:duringadownturninthebusinesscycle,someofthefactorsforwhichacapitalcushionisneededarematerializingandcapitalshouldbeappliedforthesepurposes.Capitalrequirementscanbesmallerduringdownturnswhenwrite-offsarerelativelyhighbutexpectedtodecline.Consequently,thereisaneedformechanismstodeterminecapitalrequirementsthatsufferlessfrompro-cyclicalityandcontagionsensitivityofratings.Regulatoryinitiativesinthewakeoftheglobalfinancialcrisisaimedatreducingthehardwiringofratingsintoregulation.Sofar,however,littletangibleprogresshasbeenmade.Apossibleinstitutionalsolution,insteadofusingCRAstodeterminecapitalrequirements,inthecontextoftheBaslecapitalaccordcouldincludeforexample:establishmentbybankingsupervisorsofasmallcountrycreditbureauthatdoestheabove,whiletappinginformationfromIFIsandexportcreditagencies.Suchanewinstitutionwouldhavetobeindependent,bothofprivateactorsandgovernmentsinitsdecision-making.Thissolution,orsimilarwouldcutthelinkbetweenCRAratingsandtheBaselCapitalAccord,whichevidencesuggestsincreasespro-cyclicalityinfinancialregulation,insteadofpromotingcounter-cyclicality.Suchasolutioncouldbringaboutthedesiredunlinkingregulatoryrequirementsfromcreditratingsissuedbyprivatefirms.However,it,too,comeswithgovernancechallengesregardingtheinstitutionalandpoliticalindependenceofsuchaninstitution.

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3.) Reduce cliff effects

Standardsettersacrosstheglobeshouldworktowardssofteningtheinvestmentgradecliffeffect.Theartificialdivisionoftheinvestableuniverseintotwodistinctreservesofinvestmentandspeculativegradeisanoversimplification.Itdoesnotonlynotdojusticetothemuchfinergradationsoftheratingsscale,butalsocreatesself-inflictedrisksforfinancialstability.Whatwasoncedesignedasaneasyshorthandmarketconventionhastakenonasupersizedlifeofitsown.Policymakersshouldtakebackcontrolandreducetheundesirablesideeffectsofthedivide.Anyreformwillhavetoconsiderthatsomedegreeofaggregationofcreditriskswillberequiredforasmoothfunctioningofthecreditandbondmarketsandtoaccommodatethelackofdeeperfinancialeducationofmanyretailinvestors,thataremeanttobeprotectedbysuchclassificationsfromoverlyriskyexposures.Amiddlewaycouldconsistofdividingtheratingsuniverseintohigh-,mid-andlow-graderatings.Ideallytherewouldbesomeoverlapintheratingsscalesothatadowngradedoesnotleadtoacompletelossofonesetofinvestors(whichare,forexamplerestrictedtohighgrade),beforeanothersetofinvestors(mid-grade)comesin.Anoverlapwouldpermitforasmootherentryandexitofinvestorclasseswithdifferentriskappetites.Thedangerofsuddendownwardspiralsfollowingratingactionswouldbereduced.Agenciescouldagaintakeratingactionsinlinewiththewaytheyseecreditrisksevolving.Theynolongerwouldhavetoworryabouthowaratingactionacrossthecurrentlyexistinginvestmentgradedividecouldcreateaviciouscirclebyitselfunderminingthecreditqualityoftheissuerunderconsideration.Removingthecliffwouldenhancethequalityandcomparabilityofratingsignals,whileminimizingstabilityrisks.

4.) Improving transparency of CRA methodologies

Thiscouldbedonebyseparatingmoreexplicitly:a)analysisofsimulationsandstresstests(whilstmakingunderlyingmodelexplicitonwhichbased)andb)morejudgement-based(qualitative)analysis;a)andb)wouldbepublishedseparately,butwithinthesamereport.Thiswouldclarifywhatthejudgementelement,e.g.,ongovernanceandpoliticsofcountry,oftheratingis,asopposedtomorequantitativeevaluationofriskofdefaultis.TheglobalregulatorrecommendedinIII.1shouldberequiredtoopineontherobustnessofratingmethodologiesappliedandthetransparencyinitsworldwideapplication.Currentlynationalregulatorsonlylookatindividualratingactionsinisolationonacase-by-casebasis.Thisexpandedremitmustnotremovetheabilityofratingagenciestodesignandmodifythecriteriaunderwhichtheyassignratings.Thatisoneoftheircoreresponsibilities.Buttheglobal

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regulatorneedstobeempowered(bothinstitutionallyandprofessionally)toscrutinizeandchallengethemethodologicaldecisionstakenbytheagenciesmoreforcefully.

5.) Long-term ratings

Thelong-termcreditratingissuedbytheagenciesaresupposedlycalibratedtoreflectcreditriskupto3to5yearsintothefuturefornoninvestmentgradeissuersanduptotenyearsforinvestmentgrade.Thisisamuchlongerhorizonthatwhatnormallyprevailsinfinancialmarkets.Buttheaspirationaltimehorizonpostulatedbytheagenciesdoesnotchimewithobservablereality.Inthefieldofsovereignratings,theeconomicandfinancialforecastsappliedforthisforward-lookinglong-termratingrarelyextendsbeyondthreeyears.Inotherassetclassesitisless.Itappearsthattheactualratinghorizonismuchshorterandtypicallynotbeyondtwotothreeyears.Atthesametimelonger-termtrends,fromageingsocietiestoclimatechangeareboundtobecomemorebindingcreditrisksforsovereigns.Andsovereignissuershavetakenrecoursetoeverlongertenorsintheirbondissuance,pushingtheyieldcurveinsomecasesoutto50oreven100years.Overthepastdecadeaveragetermtomaturityhasincreasedinmostcountrieswherethecorrespondingdataisavailable.Incombination,thesetrendsmakealonger-termperspectiveofratingsincreasinglyurgent.Ratingagenciesshouldbecompelledtomakemoreexplicitlong-termcreditanalysisorstopratingbondsaboveacertaininitialmaturity,e.g.,10years.Therelativeshort-termperspectiveoftheratingscanbemisleadingwhenratingsareappliedtoratepaymentstreamsdecadesintothefuture.Suchlonger-termratingsshouldexplicitlyreflectplausiblecreditimpactsofclimatechange.AswasshowninsectionII.4,researchhasshownthatlong-termsovereignratingimplicationscanbesubstantial,forrichandpoorcountriesalike.Establishingsuchlonger-termratingswillallowinvestorstogaugetheireffectiveriskexposuremorereliably.Currentlytheyarewithoutanyreliableyardstick.Anadditionalbenefitwouldconsistinincentivizinggovernmentstoengageinlessmyopicpolicies:arobustclimatemitigationpolicy,forexample,couldimproveasovereign’sratingrelativetoitspeers.Rightnow,nosuchincentiveexists.

6.) Alternative ownership models

Callstocreateneworpubliccreditratingagencieshaveresonatedfromdifferentcorners,withparticularstrengthaftercrises,andespeciallyduringtheCOVIDinducedcrisis(Li,opcit;Gosh,2021).Indeed,Gosh(opcit.)hasrecentlyarguedthatthecaseforanindependentpublicratingsagencyhasneverbeenstronger.InitsTradeandDevelopmentReport2020,UnitedNationsConferenceonTradeandDevelopment(UNCTAD)advocatedforaninternationalpubliccreditratingagencytoprovideobjectiveexpert-basedratingsofthecreditworthinessof

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sovereigns,includingdevelopingcountries.UNCTADhaslongarguedthattheworldneedssuchanindependentpublicratingsagency.SuchapublicCRAagency,whichcouldberegionalorglobal,deservesseriousconsideration,especiallyasacomplementtoexistingprivateCRAs.Afterall,competitioncanintroduceefficiency.Indeed,itispossiblethatthecreationofapublicCRAcouldencourageimprovementsintheefficiencyofprivateCRAs.Furthermore,apublicCRAwouldnothavethetypeoffinancialincentives,whichcouldencourageprivateCRAstobetoolenientinboomyears,asthisismorelikelytoattractclientsfortheirbusiness,whichisanimportantadvantageofpublicCRAs.However,apublicratingagencywouldcomewithpotentiallyitsownsetofconflictsofinterest,whichrequirecarefulmanagementtoallowanalyststooperateatarmslengthfromgovernments’influence,orthatofanyotherpublicbody.Apubliclysponsoredratingagencycouldbefounded,specializingontheverylong-termratings.Thisagencycouldbeusedasabenchmarkthroughwhichtheincumbentagencies’ownlong-termratingscanbeassessed.Theverylong-termnatureoftheratingsmaylessenthepotentialforconflictofinterest,butitdoesnotremoveitcompletely.Stronggovernancestandardswillthereforeberequiredtoensureanarms-lengthrelationshipwithgovernmentsandavoidconflictsofinterest.Analternative,especiallyforissuingultra-longcreditratingssuchasdiscussedabove,couldbeanindependentfoundation-basedmodel,withanot-forprofit-institution,thatwouldhaveitsowngovernance,beingarmslength,bothfromgovernmentsandtheprivatesector,buttrustedbyboth.Initslong-termcreditratings,suchanagencycoulddevelopexpertiseandincorporatelong-termelementssuchascountries’vulnerabilitytoclimatechangeandtheirinvestmenteffortsatadaptationandbuildingresilience;morebroadly,itcouldevaluatetheimpactofcountries’investmentonthefuturegrowthanddevelopmentofthesecountries,whichwillinfluencetheirfutureabilitytoservicedebt,dimensionsnotcurrentlytakenaccountofbyexistingratingagencies.

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