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Are Credit Ratings Agencies Always 100% Right and Reliable? : Razak Kojo Opoku Writes

89

 

Credit Ratings Agencies such as Standard and Poor’s(S&P) Global Ratings, Fitch Ratings, Moody’s Investors Service and DBRS Morningstar are NOT always 100% right and reliable. It has been established that sometimes there is a conflict of interest between bond issuers and these credit ratings agencies. “The conflict of interest between credit ratings agencies and the bond issuers from whom they receive fees sincerely undermines the ability of credit ratings agencies to give an unbiased assessment of credit risk.

It is inappropriate to entrust credit ratings agencies with the power and relevance to solely determine the creditworthiness and destiny of Sovereign Countries and national governments.

Credit Ratings Agencies especially S&P Global Ratings were very instrumental in bringing about the global financial crisis in 2008. The credibility and integrity of credit ratings agencies have been badly tarnished by their involvement in:
1. Asian Financial Crisis
2. Financial collapse of New York City in the mid-1970s.
3. Enron Scandal

The Financial Crisis Inquiry Commission in the United States of America and European Union Officials largely put the blame on Credit Ratings Agencies for the global financial crisis and European Sovereign Debt Crisis respectively. The failure of credit rating agencies in this instance were attributed to incompetence and negligence.

According to Gary Witt(formerly of Moody’s CDO Unit) during his testimony to the Financial Crisis Inquiry Commission stated that and I quote, “Moody’s didn’t have a good model on which to estimate correlations between mortgage-backed securities so they made them up”. “Credit ratings agencies sometimes promote inferior products knowing the quality of these products. The credit ratings agencies know that the risk is great or that the securities are not really AAA yet they passed them as AAA”. This is purely conflict of interest and that is the more reason why some leading experts suggest that credit ratings agencies should be forced to work or operate under the Investor-Pays Model to avoid conflict of interest in their operations.

Has S&P Global Ratings of Ghana as CCC+ stops the implementation of:
1. Free SHS and TVET Policies of Government? Certainly not.
2. 1 District 1 Factory Policy? Certainly not
3. Road Construction and Infrastructure projects across the Country? Certainly not.
4. Regular supply of electricity across the Country? Certainly not.
5. Payments of salaries for public sector workers? Certainly not.
6. Any government’s policy or programme? Certainly not.

Moving forward, there is the need to speed up the process of setting up an African Credit Ratings Agency as it was reiterated by President Macky Sall of Senegal and President Akufo-Addo of Ghana during the 54th Session of the Conference of African Ministers of Finance, Planning and Economic Development and 35th African Union Summit respectively.

The establishment of an African Credit Ratings Agency(ACRA) would help African Countries to access capital and Integrate the continent with global financial markets which always makes reference to credit ratings from the United States of America/London and Canada.

It is only an inferior mind who think that these credit ratings agencies are 100% perfect and cannot make mistakes in their dealings with Sovereign governments across the World. Some of these mistakes led Moody’s Investors Service to wrongly downgrade Ghana from B3 to CAA1 by omitting key information.

There is a certain kind of bias against African economies by American Credit Ratings Agencies.

Sri Lanka, a totally collapsed economy was rated CC by S&P Global ratings on 13th April 2022 and later downgraded to SD in April 25, 2022. Fitch Ratings rated Sri Lanka as C on April 13th, 2022 and Moody’s on 18th April 2022 rated Sri Lanka as Ca.

Gambia has been relying on Central Bank of Nigeria to print its legal tender(currency) due to acute currency shortages amongst other currency challenges in Gambia yet Fitch Ratings has been rating Gambia as CCC, CCC+ & B-.

Cape Verde declared a social and economic emergency driven by unprecedented food security and effects of Russia-Ukraine War, COVID-19 pandemic and drought yet Fitch Ratings affirmed Cape Verde as B- with stable outlook.

Some have argued that, Investors always consider analysis of the balance sheet of a Country’s economy before investing. This cannot be entirely the true account. Russia, Ukraine, South Africa, Nigeria, Egypt, Malta, etc. have better balance sheet yet Benin, Bahamas etc. are better rated than them by S&P Global Ratings. There are more investors in Russia, Ukraine, South Africa, Nigeria, Egypt and Malta than in Benin and Bahamas.

Others are also saying that, gradings have positive correlation with the economic outlook of every economy. This is never true. The economic outlook of United States of America, China, United Kingdom, Japan, France and Russia are far better and excellent than Australia, Denmark, Liechtenstein, Luxembourg, Netherlands, Norway, Sweden, Singapore yet they do not have better ratings than them according to S&P Global Ratings.

Credit Ratings are good for borrowing but they do not determine the success of an economy.

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Are Credit Ratings Agencies Always 100% Right and Reliable? : Razak Kojo Opoku Writes

89

 

Credit Ratings Agencies such as Standard and Poor’s(S&P) Global Ratings, Fitch Ratings, Moody’s Investors Service and DBRS Morningstar are NOT always 100% right and reliable. It has been established that sometimes there is a conflict of interest between bond issuers and these credit ratings agencies. “The conflict of interest between credit ratings agencies and the bond issuers from whom they receive fees sincerely undermines the ability of credit ratings agencies to give an unbiased assessment of credit risk.

It is inappropriate to entrust credit ratings agencies with the power and relevance to solely determine the creditworthiness and destiny of Sovereign Countries and national governments.

Credit Ratings Agencies especially S&P Global Ratings were very instrumental in bringing about the global financial crisis in 2008. The credibility and integrity of credit ratings agencies have been badly tarnished by their involvement in:
1. Asian Financial Crisis
2. Financial collapse of New York City in the mid-1970s.
3. Enron Scandal

The Financial Crisis Inquiry Commission in the United States of America and European Union Officials largely put the blame on Credit Ratings Agencies for the global financial crisis and European Sovereign Debt Crisis respectively. The failure of credit rating agencies in this instance were attributed to incompetence and negligence.

According to Gary Witt(formerly of Moody’s CDO Unit) during his testimony to the Financial Crisis Inquiry Commission stated that and I quote, “Moody’s didn’t have a good model on which to estimate correlations between mortgage-backed securities so they made them up”. “Credit ratings agencies sometimes promote inferior products knowing the quality of these products. The credit ratings agencies know that the risk is great or that the securities are not really AAA yet they passed them as AAA”. This is purely conflict of interest and that is the more reason why some leading experts suggest that credit ratings agencies should be forced to work or operate under the Investor-Pays Model to avoid conflict of interest in their operations.

Has S&P Global Ratings of Ghana as CCC+ stops the implementation of:
1. Free SHS and TVET Policies of Government? Certainly not.
2. 1 District 1 Factory Policy? Certainly not
3. Road Construction and Infrastructure projects across the Country? Certainly not.
4. Regular supply of electricity across the Country? Certainly not.
5. Payments of salaries for public sector workers? Certainly not.
6. Any government’s policy or programme? Certainly not.

Moving forward, there is the need to speed up the process of setting up an African Credit Ratings Agency as it was reiterated by President Macky Sall of Senegal and President Akufo-Addo of Ghana during the 54th Session of the Conference of African Ministers of Finance, Planning and Economic Development and 35th African Union Summit respectively.

The establishment of an African Credit Ratings Agency(ACRA) would help African Countries to access capital and Integrate the continent with global financial markets which always makes reference to credit ratings from the United States of America/London and Canada.

It is only an inferior mind who think that these credit ratings agencies are 100% perfect and cannot make mistakes in their dealings with Sovereign governments across the World. Some of these mistakes led Moody’s Investors Service to wrongly downgrade Ghana from B3 to CAA1 by omitting key information.

There is a certain kind of bias against African economies by American Credit Ratings Agencies.

Sri Lanka, a totally collapsed economy was rated CC by S&P Global ratings on 13th April 2022 and later downgraded to SD in April 25, 2022. Fitch Ratings rated Sri Lanka as C on April 13th, 2022 and Moody’s on 18th April 2022 rated Sri Lanka as Ca.

Gambia has been relying on Central Bank of Nigeria to print its legal tender(currency) due to acute currency shortages amongst other currency challenges in Gambia yet Fitch Ratings has been rating Gambia as CCC, CCC+ & B-.

Cape Verde declared a social and economic emergency driven by unprecedented food security and effects of Russia-Ukraine War, COVID-19 pandemic and drought yet Fitch Ratings affirmed Cape Verde as B- with stable outlook.

Some have argued that, Investors always consider analysis of the balance sheet of a Country’s economy before investing. This cannot be entirely the true account. Russia, Ukraine, South Africa, Nigeria, Egypt, Malta, etc. have better balance sheet yet Benin, Bahamas etc. are better rated than them by S&P Global Ratings. There are more investors in Russia, Ukraine, South Africa, Nigeria, Egypt and Malta than in Benin and Bahamas.

Others are also saying that, gradings have positive correlation with the economic outlook of every economy. This is never true. The economic outlook of United States of America, China, United Kingdom, Japan, France and Russia are far better and excellent than Australia, Denmark, Liechtenstein, Luxembourg, Netherlands, Norway, Sweden, Singapore yet they do not have better ratings than them according to S&P Global Ratings.

Credit Ratings are good for borrowing but they do not determine the success of an economy.