This policy proposal aims to enable low- and middle-income countries to raise capital on terms that reflect their developmental needs and long-term social and ecological investments rather than short-term market perceptions of risk: Since the 1980s, private credit ratings have become a form of unelected economic governance: They determine the cost of capital for sovereigns on the basis of the risk of default and GDP (and the cost of capital for sovereigns meanwhile applies to all firms and institutions within the sovereign borders as well), they influence foreign investment flows, and determine the terms of access to essential development finance. Their assessments are opaque, subjective, characterized by methodological bias, and reflect the interests of creditors and capital markets rather than developmental, social, or ecological priorities. For instance, African sovereign bonds are burdened by, what has been described, as an “unjustified” risk premium which results in African governments incurring an additional borrowing cost of 2.9% on their foreign currency-denominated bonds. A Multilateral Credit Rating Agency (MCRA) is a propositional alternative to the oligopoly of the Big Three credit rating agencies (CRAs) which currently issue over 94 per cent of all outstanding sovereign risk ratings. The MCRA would act as a strategic counterweight to the collective power of private CRAs and be housed, potentially, within the United Nations.
The design, methodology, function and objective of the MCRA will explicitly counter the numerous critiques of current CRAs, such as:
(a) credit ratings are skewed by income, not actual risk. Empirical analysis shows that GDP per capita—not solvency indicators—is the strongest predictor of sovereign credit ratings, and that too on short-term trajectories of five to ten years, leading to procyclical investment patterns that funnel capital to already-rich countries and perpetuate underinvestment in high-potential regions;
(b) the ‘issuer pays model,’ where CRAs deliver rating judgements to the very financial clients who pay them for assessments, raising questions over the objectivity, motives, and legitimacy of the ratings methodology;
(c) the ‘home bias,’ wherein CRAs issue higher ratings to their home country and countries that have similar economic, political, cultural and social characteristics;
(d) Fiscal consolidation is viewed as “credit positive” by CRA methodology, generating a cyclical dynamic that has been called the ‘downgrade-austerity. The MCRA will pilot new methods of risk assessment grounded in the following key objectives and methods : achieving debt sustainability through long-term trajectories; supporting and delivering public goods and services rooted in the function of social provisioning that expands the domestic tax base, and in turn, public purse; integrating assessments of national and local production structures and industrial configurations, including small and medium enterprises and the informal labor market; addressing severe wealth inequality, and enabling a just transition rooted in decarbonized energy systems, climate resilience and adaptation investment.
These new paths cannot simply adjust or provide minor updates to the methods of the private rating agencies . The basis of the MCRA must be such that it will be daunting if not technically impossible for the private rating agencies to replicate. A bold approach is possible due to the access the MCRA will have to the wealth of information and research generated by the various programs, agencies and funds housed within the United Nations . The MCRA would have a unique role, edge, and design for supporting sovereigns in the 21st century, and would enhance support for the UN SDGs.
