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International Non-Profit Credit Rating Agency for Sovereign Risk

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International Non-Profit Credit Rating Agency for Sovereign RiskThe financial crisis in 2008 served as a catalyst to bring the shortcomings of the financial sector to the attention of the broader public. One of the key institutions put under the microscope regarding their operations and results are credit rating agencies (CRAs). CRAs are service providers that specialize in the provision of credit ratings on a professional basis. Their “job description” is to inform investors about the likelihood that they will receive all principal and interest payments as scheduled for a given security.

Last year marked the first time that the ratings of the US and some European countries have been downgraded. In light of these downgrades and their critical timing, the acceptance, transparency and legitimacy of sovereign ratings have been put into question. Many actors, from governments to corporate players to civil society organizations, are calling for a reform of the sector. CRAs can play a major role in predicting and preventing financial crises; therefore it is important to discuss how to make the sector most effective. The CRAs of the future need to reflect the changing needs and demands of investors and pay tribute to established patterns and new developments in the sector. They also must take into account the needs of the emerging market and developing countries.

The Bertelsmann Foundation recently published a proposal for an alternative to existing credit rating agencies: an international non-profit CRA called INCRA. The proposal provides a new legal framework that is based on an endowment solution to guarantee sustainability and security for its long-term existence. This CRA would conduct its unsolicited sovereign-risk assessments on a set of macroeconomic and forward-looking indicators that would provide the basis for high-quality analysis. This proposal is one solution to a highly-complex set of problems facing the credit rating agency sector today.

How can the international community work to reform the credit rating sector? Should sovereign risk analysis be separated from corporate risk analysis? How can conflicts of interest be minimized? How can transparency and quality of ratings be ensured? What type of CRA will best pay tribute to the changing needs and demands of society?

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