A Blueprint for an International Non-Profit Credit Rating Agency

At the 4th Annual Bertelsmann Foundation Conference on global financial recovery and jobs, the blueprint for an International Non-Profit Credit Rating Agency (INCRA) was unveiled. The presentation, entitled “Positive Outlook: A Blueprint for an International Non-Profit Credit Rating Agency,” addressed several topics, including concerns about for-profit credit rating agencies’ potential conflicts of interest, especially considering that they are paid by issuers. As an answer to this concern, INCRA’s non-profit structure would contrast greatly with those of Standard & Poor’s, Moody’s and Fitch Ratings. The speakers Rolf Langhammer (VP of Kiel Institute for the World Economy), Vincent Truglia, (Managing Director of Global Economic Research, Granite Springs Asset Management, former Managing Director of Moody’s) and the moderator Annette Heuser (Executive Director of the Bertelsmann Foundation) all offered their insights.

An International Non-Profit Credit Rating Agency (INCRA) would introduce new methodologies and indicators for a more forward-looking analysis of sovereign risk.  Factors would include political and institutional stability and the political will and socio-economic capacity to repay debts and a nation’s economic history. The latter is particularly important for middle and low-income nations because, as Vincent Truglia, Managing Director of Global Economic Research pointed out, where macroeconomic actors have a greater influence over their ability to meet debt service.  Macroeconomic indicators would include:

• Nominal GDP (gross domestic product) in US Dollars

• Nominal GDP growth (in terms of local currencies)

• Population growth

• Consumer price indices (inflation)

• General government revenue to GDP ratio, domestic credit to GDP ratio

• Debt service ratio, external debt to exports ratio

Moreover, the measure of a nation’s willingness to repay its debts is important because ability to repay debts is necessary, but not a sufficient condition for debt repayment.

Overall, INCRA is groundbreaking and innovative in terms of both its legal structure and methodologies. Forward-looking indicators that incorporate early warning systems to account for crises and their resulting shocks separate INCRA from previous CRAs (credit rating agencies). Additionally, the guaranteed participation of all relevant international players and experts at the local level makes INCRA the first truly international credit rating agency.