Mohan:
These rating agencies are really crazy. When the SE Asia was beginning to deteriorate around June 1997, these agencies were still rating those currencies high while foreign banks were pulling out. Only after the SE Asian economies collapsed, did the raters rate these currencies as junk. This does not make sense. Take, for example, S. Korea. When won reached 1800 level, the raters rated won as junk. Since then won has steadily appreciated to the current level.
I agree with the French Finance Minister's argument that rating a country like India is not sensible. If the assets of a country are million-fold larger than the external borrowing, how can the country be expected to default? The rating should merely reflect whether or not a country like India will have a debt moratorium. India being a stable democracy, such policy changes are adopted democratically and openly. What evidence does S&P have to presume that the probability of a debt moratorium by India has increased? If they have no such information, why change the rating?
I have had enough interaction with senior folks at Moody's, S&P and Fitch who have frankly admitted that their ratings are quite subjective, especially, when they have no historical data.
The bottom line, though, is that rating changes affect the cost of capital in the short-run and induce a volatility in the COC in the long-run.
Rational |
