BRICS to re-rate the world
April 11, 2013, 8:20 am

Not everyone rates very highly the idea of the BRICS, but no one should underestimate how the BRICS intend to re-rate the world. Western rating agencies have long had a political and economic agenda when assessing and assigning a wide array of risk indices. The BRICS plan to break this global rating hegemony with their own rating agency.

Countries, like financial institutions, covet the highest possible credit rating. The higher the credit rating the lower the perception of risk. Countries and financial institutions make investment decisions based on this credit-risk equation. The problem with the current rating regime is that it is rigged in favour of the west by the big three western rating agencies – S&P, Fitch and Moody’s.

The big three rating agencies are no longer to be trusted. At the start of the Great Recession, S&P, Fitch and Moody’s not only did not see the financial crisis on the horizon, but they actually contributed to the crisis. Western financial institutions paid the rating agencies to have themselves rated. Not surprising that these same financial institutions received very desirable ratings in return. Interestingly, there is no rating agency to rate the rating agencies. This is all very convenient for those willing to play this game of farce. This is at the same that the emerging market world sees itself as being “unrated” by the big three.

Thus, the timing for an alternative global rating agency could not have been better. Pavel Zhazhin, general manager at Crossbeam sums up the sentiment, “That’s the right decision in the right time. International ratings are showing lack of flexibility and adoption to emerging markets realities, especially in uncertain and challenging economic situation. BRICS-led rating will help to increase investment flow and a number of joint projects between alliance countries. The latest BRICS forum clearly identified a need in rating tools customisation.”

The US justice department has sued S&P and Moody’s, arguing the firm’s allegedly fraudulent ratings caused billions of dollars in losses for federally insured banks and credit unions.

Democratic senator Richard Blumenthal of Connecticut had said he found rampant abuse across the credit rating industry.

Interestingly, S&P’s lead lawyer, Floyd Abrams of Cahill Gordon & Reindel, hinted to CNBC that the US government’s suit is retribution for S&P’s downgrade of the US credit rating in 2011.

Retired Indian home secretary Gopal Krishna Pillai had said earlier when referring to the big three, “The control of intelligence and information is so biased in many ways.” He went on to say that western rating agencies control what he described as the “skewed information inflows” in the world.

The official Policy Concept on Russia’s Participation in BRICS document also states that the creation of an independent rating agency of BRICS “would contribute to a more objective assessment of the market position of national companies and banks in BRICS countries.”

Some Russians are far more direct. Sergei Glazyev, President Vladimir Putin’s economic adviser, is on record saying, “It’s already abundantly clear that the work of all three American agencies is directed toward inflating the US rating and lowering ratings for emerging economies.”

So what do the BRICS want to accomplish? Institutionally, the BRICS intend to develop an alternative mechanism to provide credit-risk ratings to the emerging market world (possibly even for the developed world at a later time). This mechanism would be independent from the west’s big three. Providing an alternative and being independent are key with a rating agency of a new kind to be successful.

Georgy Toloraya, head of regional projects department, regional director for Asia and Africa at “Russkiy Mir” Foundation and the executive director, BRICS National Research Committee, Russia, sees the initial mission of this new rating agency as the following, “So far the BRICS countries companies see each other through the Western eyes, namely the well-established rating agencies. The idea of creating a BRICS independent rating agency is therefore useful for more immediate assessment of the market prospects and economic agents within the BRICS realm.”

There is also a business angle involved – challenging S&P, Fitch and Moody’s virtual monopoly in the rating sector. According to most estimates, the global rating business is worth ten billion dollars annually and the west’s big three have a 90 per cent market share. The BRICS intend to break into this market where there is very little competition. Additionally, the idea of establishing a BRICS-led and alternative rating agency is an act of principle and in line with the new political and economic trends.

The current global order is ageing fast and ill-equipped to deal with the rise of the global south. It is the emerging market world that is today driving growth and consumption. The rules of the game are changing and those who have judged for so long will soon likely find themselves judged by a different – even fairer – standard.