Credit rating.. its nature and importance for countries and institutions

In a world governed by the rules of the capitalist economy, we find that debt as a mechanism is of great importance, as it is the one that finances the projects of companies and countries, and on them many economic decisions and strategies are built, hence the need to organize the world of debt, and among the requirements of this world, standing on the capabilities of the debtor And its ability to repay the debt regularly, which does not disturb the debt market, and guarantees the rights of creditors.

We have always looked at the media that publish the reports of credit rating agencies about banks, major companies, or countries, and perhaps the most important aspect of credit rating is what is related to countries, as they have positive or negative conditions in relation to the cost of borrowing.

• If the credit rating of a country is strong, it means that the country has creditworthiness, which enables it to obtain loans and repay them on time. If a country is weak, the cost of obtaining debt is high, and creditors may even deter its lending, despite the countries’ need for those loans.

What is a credit rating?

Credit rating, for companies, banks or countries, means the creditworthiness, or the ability of those entities to obtain the necessary loans, and the extent to which they fulfill their obligations on time, and usually looks through the credit rating to several indicators, including:

Assets owned by the entity requesting the loan.

As well as the ease of cash flows to it, whether from inside or outside

Also, the history of his dealings with creditors, and the interest rates at which he obtained his loans before.

In the case of countries, the rating agencies report usually deals with the extent of the state of political and security stability, and its impact on the economic situation, especially the ability to repay debts.

The rating usually deals with the time dimension of the status of the entity covered by the rating, in terms of the short or long term, so we usually find reports from credit rating agencies that put the phrase “negative, positive, unstable, or stable future outlook.”

Another concept related to the credit rating, which is the sustainability of the debt, whenever the entity requesting the loan is able to pay its obligations towards the debt, including interests and installments, on time, and does not request a postponement of payment, or debt restructuring, or extending the repayment period or has not defaulted in payment. Describe the debt of this entity as sustainable, and it is eligible to obtain loans from creditor institutions, whether they are international or commercial institutions, or from international debt markets, such as the international bond market.

The credit rating is an instrument of the validity or invalidity of the entity concerned, to obtain loans from credit markets, or international financial institutions, and the entity requesting loans usually resorts to obtaining a report on its credit status from credit rating agencies, or it prepares it through its departments Internal, but sometimes, external parties perform the rating to ensure the transparency of the information contained in the reports on the credit rating, on which the credit decision can be based.

- Credit rating agencies, at the beginning of their work, published their reports on countries and institutions in return for a subscription, for those who wanted to obtain them, but due to the loss of their material rights due to copying or photocopying those reports and not paying a fee for them, they then placed the costs of preparing these reports on those who request them, whether were institutions or states.

International credit rating agencies

The credit market knows 3 major institutions, concerned with issuing credit reports on institutions and countries, which are Moody's, Standard & Poor's, and Fitch, and some of these agencies practiced their work at the beginning of the 20th century, but it gained great importance, when it was approved by the US Securities Commission in 1975. , as credible and accreditation bodies have.

These agencies are American institutions, since their inception until now.

These agencies control a large proportion of the market for issuing credit ratings, estimated by some at 95%, but the share of Moody’s and Standard & Poor’s is the largest, and the share of Fitch is declining compared to the other two agencies, although the market has recently witnessed the birth of a Chinese rating company, but it is still below The level of the other three agencies.

Rating levels of credit rating agencies, ranging from (AAA) "high security", which is the highest rating of creditworthiness, even if it includes affiliated grades such as (AA), or (A), then (BBB) ​​rating, which means medium creditworthiness. And its various degrees, as in the previous classification, then the classification (CCC) of “high-risk creditworthiness”, then the last classification (DDD) of “failing creditworthiness” and their different degrees as in the previous two classifications.

The impact of rating agency reports on economies and currencies

It is noted that there are different effects of the reports of credit rating agencies on the performance of the various economies of countries and their currencies, depending on the extent to which the state controls the management of the economy.

Reports of credit rating agencies may help the flow of foreign investments to the country, and thus raise the value of its currency, or vice versa, it may help the exit of foreign investments, especially those indirect investments, which can exit quickly from vulnerable markets.

The local currencies in this case are significantly declining, affected by the exit of funds for those investments, due to the increased demand for foreign currencies in the local market.

As for the economies that witness a great deal of interference by states, the influence of rating agencies on their economies is limited, especially in the local environment, but on the external level, the reports of these agencies are highly influential.

International institutions and the approval of the reports of rating agencies

- International financial institutions usually require countries requesting assistance or loans to have a credit rating that determines their creditworthiness, as one of the justifications for dealing with them.

In addition, international institutions, through their teams of experts, stand on the reality of the credit situation of the countries that request their assistance and obtain loans, and the reports of rating agencies are usually a justification for marketing the borrowing countries to international creditors, or debt markets.

impartiality questionable

- The original credit rating agencies are neutral technical institutions, but practice has proven that some of these reports, and at times, were politicized, according to the will of the major powers.

For example, in 2010, during the era of US President Barack Obama, the Standard & Poor’s report went to reduce the credit rating of the United States of America, which angered America, and America demanded that the agency withdraw its report within 24 hours, which has already been done, and the situation was reclassified America's credit score is at its highest (AAA).

- The situation was repeated with about 9 European countries after the worsening of the financial crisis for Europe after 2010, which prompted some European countries, led by Germany, to think about establishing a special rating agency for Europe.

The same was repeated in 2018 with Turkey, where its credit rating was downgraded despite its good economic performance, due to its political dispute with the administration of US President Donald Trump.