The idea of establishing an alternative credit rating agency led by the BRICS bloc of countries is gaining momentum. But there are questions as to whether it will prosper given the major challenges it’s bound to face.
Leaders from the bloc made of Brazil, Russia, India, China and South Africa are championing the idea. The idea formerly emerged during the 2015 BRICS summit in Ufaand was affirmed by the Goa Declaration at the 8th BRICS Summit. Most recently South Africa’s President Jacob Zuma said BRICS countries had taken the decision that they could rate themselves, and perhaps others too. The aim would be to ensure a more “balanced view” when ratings are made.
Both Brazil and Russia have recently been downgraded by Moody’s. And for over a year South Africa has lived with a possible downgrade by the “big three” Western credit rating agencies, Standard & Poor’s, Moody’s and Fitch.
The big three have faced increasing criticism. Critics claim that the frequent downgrades of developing countries are unjust and serve Western political interests.
BRICS has started engaging financial experts on a business model for the new rating agency as well as what methodology it would adopt.
This isn’t the first time there’s been an attempt to challenge the big three. China, Russia, India and Brazil have all established their own credit rating agencies. But none has ever come close to establishing itself as an alternative.
Will the BRICS initiative be the exception?
Critics of the big three were emboldened after the 2008 financial crisis. The rating agencies were forced to pay over $2.2 billion in fines relating to their complicity in the credit crisis. This further damaged their credibility and heightened accusations, particularly in emerging countries.
Critics have also attacked the rating agencies’ issuer pay model. Under this system credit rating agencies are paid by the institutions being rated (debt issuers) and not by the investors who use the information, creating a conflict of interest. Critics also argue that this entrenches geopolitical biases.
The hope is that a new agency would compensate for the perceived bias in the global financial architecture. It would also create competition and offer investors, issuers and other stakeholders a wider choice and a more diverse view on creditworthiness.