S Balakrishnan

It is among the fastest growing and largest economies of the world with $ 300 billion in foreign exchange reserves and a 60-year old functioning democracy with Anglo-Saxon legal systems. Foreign investors are clamouring for a piece of the action, with new investments pouring in from every part of the globe.

It is a model of prudence when it comes to monetary management. Unmistakeably India.

Yet, the world’s largest credit rating company, Standard & Poor’s, thinks the country’s credit rating is little better than junk. Should it be taken seriously?

It wouldn’t be far off the mark to say that the raters themselves have a pretty inglorious record in recent times. In fact, the blame for the current mortgage and sub-prime crisis enveloping the US and global banks and investors can be laid entirely at their door.

Were they so gullible as to believe that a securitising institution providing a loss cushion of a few percentage points on a portfolio of retail assets is enough to magically transform the portfolio into an ‘AAA’ asset?

It is hardly believable.

The unfortunate truth is that (like the ‘Big Five’ accounting firms) they allowed the lure of fees to compromise their fundamental responsibilities.

In good faith, trust and confidence, rating agencies have been chartered to exercise due diligence and care on behalf of investing institutions and the investing public.

The reward has been raters joining hands with issuers and originators to tailor ratings to suit the interests of the latter.

Recent revelations in the ‘Financial Times’ show that the model used by Moody’s to rate a new-fangled instrument called Constant Perpetual Debt Obligations (CPDOs) contained a basic flaw, discovered later but not disclosed nor the ratings downgraded.

And the Securities Exchange Commission of the US too found damaging e-mails in its investigations of the Big Three – S&P, Moody’s and Fitch – suggesting that rating mistakes were by no means innocent and raters knew they were giving prime rating to ‘dogs’.

Their historic faux pas was, of course, Enron, which was rated ‘AAA’ and crashed to bankruptcy in weeks.

(It was just before that Enron sought every possible guarantee and counter-guarantee for its Indian power project on the ground that it was dealing with a junk credit rated country)!

Indian credit rating agencies have also been only too willing to award ‘AAA’ status to retail loans. Expectedly, these portfolios were downgraded several notches to the lowest investment grade in short order.

Again, objectivity seems to have been a casualty in the rating exercises.

There is little reason to feel alarmed about our prospective junk rating once we figure out that the quality of the rater itself may be junk!

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