TWN Info Service on Finance and Development (Sept13/03)
18 September 2013
Third World Network

G77 and China group calls for critical reforms in international credit rating agencies
 
New York, 17 September (Bhumika Muchhala) – International credit agencies have come under strong criticism by developing countries that also call for major reforms.
 
The United Nations General Assembly in New York held a thematic debate on the role of credit rating agencies in the international financial system on 10 September.  Since 2011, this debate on credit rating agencies had been called for by the Group of 77 and China in various resolutions of the UNGA Second Committee, such as the resolution on the international financial system, debt resolution mechanisms as well as financing for development.
 
The Group’s chair, Ambassador Peter Thomson of Fiji, delivered a strong statement on behalf of the Group, which emphasized various concerns over the oligopolistic nature of the current rating regime combined with existing biases in the financial ratings industry. 
 
Ambassador Thomson said that the high reliance on a few international rating agencies increases the exposure of the financial system to the accuracy of ratings.  Mistakes and biased forecasts have the potential to cause or exacerbate crises, rendering the financial system more vulnerable to cliff effects (e.g. increases in interest rates).  He added that the often arbitrary decisions by the current regime of rating agencies have harmed nations, in particular developing nations.
 
When increases in interest rates occur, Ambassador Thomson stressed that scarce resources that should be spent in much needed developmental programs are wasted on unnecessary signaling games. Not only does the arbitrary downgrading of sovereign debt force a country to pay higher interest rates, but it also forces countries to set aside more foreign exchange reserves to reassure investors. These signaling games, which aim to reassure markets, end up generating a vicious feedback loop.
 
Because developing nations must sacrifice developmental programs to pay unnecessary higher debt services, they find themselves in a paradoxical situation: the credit rating agencies (CRAs), that were part of the problem, now tell them that their risk has increased, further increasing debt servicing costs and further blocking sovereign nations from their development objectives. The rationale and ethics of this perverse mechanism are unacceptable, and the core biases of CRAs can affect debt sustainability in the developing world, said Ambassador Thomson.
 
In turn, the G77 and China called for additional mechanisms to allow for the assessment of, and the response to systemic risk posed by unregulated, or less regulated financial sector segments, centres, instruments, and actors. 
 
Ambassador Thomson stated that the Group believes that countries should disclose action plans that identify and prioritize further areas for changes in laws and regulations. A next important step would be to share lessons on the steps that can be taken by authorities to reduce references to CRA ratings in legislation and regulation and to promote strengthened credit assessment capabilities.

The Group also encourages further steps to enhance transparency and competition among credit rating agencies.  Rating agencies should be required to provide information concerning their overall past performance, and or an independent government agency should provide such information, which would enhance positive competition among rating agencies.

Developing countries must be granted full and fair representation in reform efforts of standards and norm-setting and code formulating bodies outside the UN system, such as the Financial Stability Board and the Basel Committee on Banking Supervision. The Group emphasized the need for a more transparent international credit rating system that fully takes into account the needs, concerns, and peculiarities of developing countries.
 
Market participants also need to improve their own capacity to make their own credit assessments in order that they can safely reduce their reliance on CRA ratings, said Ambassador Thomson. He also stressed the critical need for expanding the scope of regulation and supervision and making it more effective, with respect to all major financial centres, instruments and actors, including financial institutions, credit rating agencies and hedge funds.  In this context, developing countries must be given flexibility to adequately regulate their financial markets, institutions and instruments consistent with development priorities and circumstances. 
 
The imposition of needlessly onerous regulatory requirements on developing countries must cease. There should be effective, credible, and enforceable regulations at all levels, to ensure the needed transparency and oversight of the financial system.
 
Recognizing that the primary long-term goal of an enhanced surveillance must be to prevent another crisis, the Group of 77 and China repeated their previous calls for more even-handed and effective IMF surveillance of systemically important countries, major financial centres, international capital flows, and financial markets.+