When a borrowing company gets a better rating from a recognised credit rating institution, two consequences follow: 1) the lender, say the bank, reduces the rate of interest charged to the borrower because the borrower is now considered to be a bit less risky and 2) more lenders may come forward to lend to the borrower or the present lender(s) may get ready to be a little more liberal in the quantum of loans.
When international credit rating institutions upgrade the ratings of a country, the consequences are the same. How people react to such revisions in ratings depends on where they come from. A politician will react differently from an economist who in turn will react differently from an objective layperson.
It is helpful to understand the implied meaning of a rating or its revision. Moody's adopts 9 overall gradations in its rating scale. These are, in descending order of credit quality, Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C. In addition, to indicate marginal variations within a particular rating / symbol, numbers 1,2 and 3 are used as a suffix for ratings from Aa to Caa.
Thus, A is better than Baa in terms of credit quality (better the credit quality, lesser the attendant credit risk.) Similarly, Baa1 is of better credit quality than Baa2 which is better than Baa3. Though Baa1 immediately follows A3 and Baa2 immediately follows Baa1, the difference in credit quality between A3 and Baa1 is more than the difference between Baa1 and Baa2.
Baa is considered significant because any rating Baa3 and above (that is better) is supposed to signify that the rated entity (company or country) is worthy of being invested in. Thus, the ratings from Baa3 to Aaa are treated as 'investment grade'; in the other direction, Ba1 to C are considered as 'speclative grade' or 'junk grade'.
Credit rating is additionally qualified by what is called as 'outlook'. Outlook may be positive, stable or negative. These in turn indicate the probable direction in which the rating is likely to move in future. For instance, Baa3-positive means that the rating has reasonable chance of getting upgraded during next revision. This is only an indicator based on current expectations. Baa2 -stable means there is unlikely to be a revision in rating foreseeably.
Moody's have upgraded India's rating from Baa3 (lowest investment grade) positive to the immediate next better quality Baa2 stable. This is a big deal or not depending on one's political inclination.
Announcement of ratings is accompanied by release of rating rationale. This justificatory statement is nuanced enough to enable politicians to pick and choose certain sentences to support their parochial viewpoints.
The Congress party can quote the following: "A material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating. The rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply."
However, BJP can highhlight the following: "The rating could face upward pressure if there were to be a material strengthening in fiscal metrics, combined with a strong and durable recovery of the investment cycle, probably supported by significant economic and institutional reforms. In particular, greater expectation of a sizeable and sustained reduction in the general government debt burden, through increased government revenues combined with a reduction in expenditures, would put positive pressure on the rating. Implementation of key pending reforms, including land and labor reforms, could put additional upward pressure on the rating."
The purpose of ratings of countries by credit rating agencies is to enable international investors to decide where to invest. Trivialising the process to score political brownie-points is only despicable political opportunism.
When international credit rating institutions upgrade the ratings of a country, the consequences are the same. How people react to such revisions in ratings depends on where they come from. A politician will react differently from an economist who in turn will react differently from an objective layperson.
It is helpful to understand the implied meaning of a rating or its revision. Moody's adopts 9 overall gradations in its rating scale. These are, in descending order of credit quality, Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C. In addition, to indicate marginal variations within a particular rating / symbol, numbers 1,2 and 3 are used as a suffix for ratings from Aa to Caa.
Thus, A is better than Baa in terms of credit quality (better the credit quality, lesser the attendant credit risk.) Similarly, Baa1 is of better credit quality than Baa2 which is better than Baa3. Though Baa1 immediately follows A3 and Baa2 immediately follows Baa1, the difference in credit quality between A3 and Baa1 is more than the difference between Baa1 and Baa2.
Baa is considered significant because any rating Baa3 and above (that is better) is supposed to signify that the rated entity (company or country) is worthy of being invested in. Thus, the ratings from Baa3 to Aaa are treated as 'investment grade'; in the other direction, Ba1 to C are considered as 'speclative grade' or 'junk grade'.
Credit rating is additionally qualified by what is called as 'outlook'. Outlook may be positive, stable or negative. These in turn indicate the probable direction in which the rating is likely to move in future. For instance, Baa3-positive means that the rating has reasonable chance of getting upgraded during next revision. This is only an indicator based on current expectations. Baa2 -stable means there is unlikely to be a revision in rating foreseeably.
Moody's have upgraded India's rating from Baa3 (lowest investment grade) positive to the immediate next better quality Baa2 stable. This is a big deal or not depending on one's political inclination.
Announcement of ratings is accompanied by release of rating rationale. This justificatory statement is nuanced enough to enable politicians to pick and choose certain sentences to support their parochial viewpoints.
The Congress party can quote the following: "A material deterioration in fiscal metrics and the outlook for general government fiscal consolidation would put negative pressure on the rating. The rating could also face downward pressure if the health of the banking system deteriorated significantly or external vulnerability increased sharply."
However, BJP can highhlight the following: "The rating could face upward pressure if there were to be a material strengthening in fiscal metrics, combined with a strong and durable recovery of the investment cycle, probably supported by significant economic and institutional reforms. In particular, greater expectation of a sizeable and sustained reduction in the general government debt burden, through increased government revenues combined with a reduction in expenditures, would put positive pressure on the rating. Implementation of key pending reforms, including land and labor reforms, could put additional upward pressure on the rating."
The purpose of ratings of countries by credit rating agencies is to enable international investors to decide where to invest. Trivialising the process to score political brownie-points is only despicable political opportunism.
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