After Standard & Poor's, Moody's has lowered its view of France's AAA rating. The downgrade has fueled criticism of the power of US ratings agencies. But how would an independent agency do things differently?
The German Bertelsmann Foundation couldn't have picked a better day for the presentation of its independent country ratings. Once again, one of the large US ratings agencies has delivered a blow to an already struggling EU economy. France downgraded and other European countries are worried about their own ratings. That's at least what it seems like and indeed there are significant consequences when Standard & Poors, Moody's or Fitch give their verdict on a country.
Former Chairman of the Bertelmann Foundation Gunter Thielen explained this using Germany as an example: "Such ratings make a difference to all of us. Germany's rating has not only consequences for the government but for all of us tax payers."
Should Germany be downgraded, the country would have to pay higher interest rates when borrowing money on the international financial markets. "And those higher rates will in the end have to be shouldered by the tax payer," Thielen added.
No pressure to make profit
Rising interest rates in turn increase the debt level and the country is on a sliding path to even more difficulties. In Europe there have long been calls for an alternative ratings agency. One possibility would be the International Non-Profit Credit Rating Agency (INCRA). Earlier this year, the Bertelsmann Foundation presented a study on the feasibility of an alternative agency, and now the first ratings for Germany, France, Italy Brazil and Japan are on the table.
"We have in our concept looked at the traditional macroeconomic data but also included forward-looking indicators in our analysis," explained Annette Heuser, who heads the project. Those are indicators that reflect the socio-economic development of a country. For instance they'd be looking at investment in education and questions like how a country has fared with economic crises in the past. "What does this says about the abilities of a country to manage present or future crises."
AAA for Germany
Socio-economic indicators made up 60 percent of the final rating while actual economic data accounts for 40 percent. Germany received a solid 8.1 out of 10 from INCRA, which would be equivalent to the "AAA" assessment given by the traditional ratings agency. Berlin though gets a "negative" outlook due to the large amount of debt and the fact the Germany is liable for more than 300 billion euros in the EU rescue funds.
A second point that no traditional ratings agency includes is the demographic development. "The demographic change will result in an urgent need for reforms - otherwise we'll be in big trouble," Thielen explained. INCRA warned that Germany had to put in some efforts in order to maintain its top rating in the future.
Good grades for France and Italy
France received an INCRA score of 7.9, equivalent to "AA+" - exactly the rating that the country received from Standard & Poor's and Moody's. In macroeconomic terms, France is doing well, said Heuser. But in terms of reforms, the country was not headed in the right direction.
"You'd have to say that, for instance, changing the retirement age from 62 to 60 did not convince us," Heuser said. "The same was the case in terms of investments into education - a very crucial point for the future of a country and an industrial nation like France."
Italy received a 7.2 score from INCRA, equivalent to an "AA" rating. Brazil got 6.8 and Japan 6.0 which both equal an "A" score with the traditional agencies. Especially in the case of Italy, the alternative rating differs significantly from that of the US agencies. The positive estimate the country only got because of its ability to handle crises. Brazil has to live with the warning to invest too little into education and infrastructure, which might slow down growth. The rating for Japan strongly takes into account that the country has the world's highest debt levels at 230 percent of its GDP.
Future of the project still unclear
Whether INCRA will issue any more ratings in the future will depend on whether the current study turns out to be more than just an idea. The Bertelsmann Foundation said it sees its job as done after launched the project, adding that another group, such as the G20, should continue supporting the creation of an independent ratings agency.
A major problem though would be financing any such agency. Bertelsmann's model proposes a fund as the solution: governments, companies, foundations and private donors could all pay into such a fund which would need around $400 million to cover the annual operating costs of $15 to $20 million.