Indian credit rating by Moody and its down graded position at negative from stable is not some thing one did not expect. As an ex banker and reader of economic situation since 1973, I have seen the downward economic condition of India, as perceived by Western credit agencies. But do I get perturbed and start doubting the credibility of the rating agencies? Well, history tells the story of Andreas Fuchs and Kai Gehrig in their 2017 paper titled” The Home bias in Sovereign Ratings “which analyzed the determinants of sovereign ratings of 143 countries by 9 rating agencies. This article tries to understand their logic, learn the process adopted by these great researchers and wonder in awe their final conclusions. It is dedicated to youngsters to undertake a similar one on our nation.

Who did the study and what is the reason at that time to conduct the study?

56 pages research paper from Andreas Fuchs and Kai Gehrig is enclosed from relevant web site for easy reference and deep understanding for any serious reader:

The following quote from the abstract of the study is enclosed as a preamble to explain the logic and framework under which we may discuss the issue.

“Abstract: Credit rating agencies are frequently criticized for producing sovereign ratings that do not accurately reflect the economic and political fundamentals of rated countries. This article discusses how the home country of rating agencies could affect rating decisions as a result of political economy influences and culture. Using data from nine agencies based in six countries, we investigate empirically if there is systematic evidence for a home bias in sovereign ratings. Specifically, we use dyadic panel data to test whether, all else being equal, agencies assign better ratings to their home countries, as well as to countries economically, politically and culturally aligned with them.”

Let us proceed step by step to understand the study.

The countries whose credit rating were taken for critical analysis were 606 in number at the end of 2012.

The following rating agencies with the number of staff working under them were involved for study:

Serial Number Name of credit agencies   Staff    No of sovereigns rated    
1 CI 20 37
2 DAGONG 600 72
3  DBRS 200 25
4  FERI 50 56
5  FITCH 2000 101
6 JCR 90 33
7 MOODY’S 6800 113
8 R&I 250 44
9  S&P 125 125
Total number of staff involved 15010
Total number of sovereigns rated- 606.

Now let us learn what are the processes that are taken into consideration while assessing the credit rating.

Each credit rating agency engages either one or more analysts to get engaged in this process. One of them says the engagement is continuous in nature.

Let us look at how the situation prevails.

Agencies which engaged only one analyst to complete the process – CI, DBRS, FERI, MOODY’S

Others engaged two or more analysts. This also indicates the seriousness associated with the credit rating process.

I am shuddered to think one analyst down graded Indian rating which results in increase in cost of borrowing, and also affecting the rating given to Indian equity or borrowing by foreigners who deal with Indian economy. Bond market has a great impact from the views of rating agencies.

How does the process of credit rating agencies work? Though a rough sketch can be given, it does explain for a common man some knowledge. Like a flow chart the process starts from 1 to end at 12 but intermingling of processes is not unusual.

1. Rating request and agreement

2. Assignment of analytical team

3. Data collection

4. Questionnaire sent to sovereign (SN)

5. Meeting with SN

6. In depth analysis

7. Obtain additional information, if needed.

8. Draft report of rating proposal

9. Rating committee

10. Notification of issuer on rating decision

11. Rating appeal: a) agree b) ignore

12. Finalized report

13. Publication

14. Surveillance (regular updating)

The knowledge about the rating process allows us to learn how economic interests, geopolitical alignment and cultural proximity could also influence rating decisions.

Now, the factors that are taken into consideration while assessing the credit rating exercise. Too many of them, which are narrated as below:

  • GDP per capita
  • (log)
  • GDP growth
  • GDP growth squared
  • Inflation
  • Natural resources ­
  • Population (log)
  • Change in government debt ­
  • Government debt ­
  • Default (since 1970)
  • Default (last 5 years) ­
  • Current account balance
  • External debt
  • Rule of law
  • Polity
  • Election
  • Years in office
  • Left government
  • Absence of internal conflict
  • Absence of external conflict
  • Absence of military in politics
  • Euro area ­ ­ ­ ­
  • Squared
  • Number of observations 74,701 26,605 74,701 26,605
  • Number of rated countries

Having learnt the rudiments of rating agencies, the factors responsible technically for valuation of rating and the quantity of work undertaken by each rating agency, the study of the research undertaken by the authors, Andreas Fuchs and Kai Gehrig, is on the following premise:

“Summarizing the theoretical arguments about potential political economy influences and the role of culture in rating decisions, our hypothesis reads as follows:

Hypothesis: Controlling for economic and political fundamentals of rated countries, a rating agency assigns a better rating to

(1) its home country.

(2) countries in which the home country has larger economic interests.

(3) countries geopolitically aligned with its home country.

(4) countries that are culturally closer to its home country.”

For proving their hypothesis, the authors considered the following factors for consideration:

a) Same country

b) Export interests

(c) Bank exposure

(d) Geopolitical alignment (UN)

(e) US military interests (aid)

(f) Common language

(g) Cultural distance (language)

(h) Cultural distance (ethno- ­racial)

For a neutral person, it is obvious that all the above factors do influence the rating agency by the way of enhancing the rating of any country which score heavily based on above factors.

It is needless to emphasize that my views/observations carry very little value before expert comments/results achieved by great authors whose study I am explaining.

Now let us turn our attention to the real situation related to the rating country and the rating agency. Table 5 gives the results of the study based on a) to h) factors and various values given for the full sample. But let us know at least the country of origin of each rating agency.


There are various questions raised in the study which are explained pointwise:

  • Let us quote from the study the situation related to Japan, the closest military ally, the largest investor of USA (leave China out of discussion) and the one most suffered in world war as well as the one which made lot of difference between defeat and victory in world war 2, the mother of modern economic development of the world .
  • “Consider Japan. The US based agencies Fitch, Moody’s and S&P all assign ratings of “AA­ “or lower to the country plagued by demographic problems, deflation and economic stagnation.
  • German Feri had assigned an “AA” rating until it also downgraded Japan’s sovereign debt to “AA­” in June 2013.
  • The ratings of Japan issued by Dagong are even lower than those issued by its Western counterparts. The Chinese agency downgraded the country’s debt to “A” in March 2013.
  • On the other side of the spectrum, the Japanese agencies are significantly more optimistic about their home country.
  • Since Japan Credit Ratings (JCR) entered the rating business, it has continuously assigned an “AAA” rating to Japan.
  • Although JCR’s Japanese competitor Rating and Investment (R&I) downgraded its home country in December 2011, it still assigns the second highest rating “AA+.”

Our lay man’s understanding and views

Japan the closest ally of USA carries an added advantage while getting its credit ratings done by inter national agencies. It speaks of the same economic performance being looked by colored glass of agencies who get controlled by various factors explained above.

Let me give another example which is also an eye opener.

Sovereign ratings of home countries by home agencies as well as by others, a glaring comparison.

Canada China  Cyprus  Germany  France  Japan Kuwait United States
Home agencies AAA AAA B(7) AAA AAA AAA AA- AAA
Other agencies AAA AA- CCC AAA AA+ A+ AA AA+

It is of interest to note that USA has failed twice to keep international obligations and does not care to provide for repayment for excess borrowing. It believes excess printing of currencies may solve some of its international obligations though being one of the most creative countries, not many argue about its economic performance. Seriously, none argues about USA.

Now let us view how the authors conclude their arguments.

  • Extensive samples from nine agencies and six countries and top-level research indicates sovereign ratings in fact exhibit a bias.
  • Incidentally an average agency assigns one point higher to a home country than to the other.
  • Strong economic ties, exposure of home bankers to the country of study, cultural closeness developed over a long time, linguistic closeness and usage of the language of home country by the people or government, or lesser understanding of the language used by rating country by a rating agency results in lesser rating. Yes, usage of less English is an impediment in getting a better rating.
  • Geo political differences luckily play no role.
  • Substantial variation among the agencies exist or not? The study of the authors indicates a strong “yes” in nature. Four agencies do provide a better rating to their home countries than normally given to others. Five agencies did take into consideration the role played by home country banks in the rating countries.
  • Six out of nine rating agencies were affected by cultural distance as measured by linguistic differences or common language.
  • The authors in final stages of their study even recommend viewing different views of rating agencies from different countries to arrive at a common view before investing or lending decisions. This shows lack of integrity in the views of one agency.

Our conclusion

How does one judge the decision of Moody’s to down rate the credit rating of India on whatever reasons while the whole of USA/Europe or any other part of the world give a sinking feeling. Virtual closure of the world and empty streets at all corners of the world do present a depressing picture of the economy of the world. As a nation, let us get over the attitudes of rating agencies who are biased and Western educated ones whose viewing lenses go back to their student days. Those who believed totally on foreign investors/debtors bereft of local or common man support have performed miserably over the years. Let India believe in itself and improve its systems, innovate its processes, simplify the rules/regulations, remove the strangulations of government machinery on industry and the industry also move away from the clutches provided by government.

The fear should come from the splendid economic growth of our nation. Even the excellent behavior of India during the C Virus and the outstanding support given by India to outsiders indicate the bright journey of the nation in meeting the aspirations of its vast population.

It is pleasing to learn nearly 143 countries imported medicine from India, many of them free to meet the demands of millions of patients from C virus. During my young days, it was simply out of arguments.

Let me be frank, my intention is to educate a youngster through an excellent study of credit rating agencies by world class researchers.

Yes, youngsters must read the whole study several times and even undertake a similar exercise on India in college. Why not?

I do dream of a world class credit rating agency to be floated by our corporate to compete and beat the world standards.

Author Bio

Qualification: Post Graduate
Company: subramanian natarajan cpa firm
Location: NEW DELHI, Delhi, India
Member Since: 09 May 2017 | Total Posts: 189
A banker with 27 years of experience, a CPA from USA with specialization in US taxation, individual, partnership, S corporation or LLC taxation etc View Full Profile

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November 2021