The mayhem in the Indian markets, following Moody's downgrade of the State Bank of India's (SBI) stand-alone rating from ‘C-‘ to ‘D+' on Tuesday, is a clear case of massive over-reaction.
Considering the media's largely uncritical coverage of the announcement, a closer look at the rating agencies (mainly the Big Three — Standard & Poor's, Moody's and Fitch Ratings), their track-record, reputation and credibility in the international markets may be in order.
Lest this be seen as the fulminations of an affected party, it would be useful to look at the International Monetary Fund's (IMF)
In the present case, the Moody's announcement concerns India's banking icon, having a nearly 25 per cent market-share in both deposits and advances, with interests in commercial, retail and investment banking, asset management, insurance, capital markets and insurance. It is also almost 60 per cent Government of India-owned, making it a proxy for the sovereign.
RATINGS AND CDS SPREADS
The domestic market and media reaction seem to have ignored how the global markets view SBI vis-a-vis other major banks, notwithstanding the latest downgrade. The prognosis of the SBI's dollar borrowing costs shooting up significantly seems grossly exaggerated. One important indicator of the perception of the global markets to the credit risk of any entity is the spreads on the Credit Default Swaps (CDS) quoted for its debt securities.
A CDS is a kind of insurance, obliging the seller to protect the buyer against default of any issuer, on payment of a premium or ‘spread'. Table 1 gives a comparison of the latest CDS spreads (as on Wednesday) for a representative sample of major banks globally. Evidently, the global markets know something about SBI that the rating agencies do not — an ‘information asymmetry', so to speak!
It may not be out of place here to remind ourselves of the tale of the triple-A ratings for mortgage-backed securities in the US, which was the trigger for the sub-prime crisis and the global recession that followed in its wake. Similarly, in 2007, just a year before Iceland nearly ‘melted', Moody's rated the country's top three banks (Glitnir Bank, Kaupthing Bank and Landsbanki) virtually on par with the US Treasuries.
UNCHECKED POWER
In sovereign ratings, too, there is a huge apparent disconnect between economic reality and the current ratings. For a flavour of this dichotomy, Table 2 compares the ratings for four countries. In Moody's reckoning, China's rating is below Spain's and Thailand's better than India's! This, when Spain had an external debt stock of $2.166 trillion, as against China's $0.43 trillion and India's $0.24 trillion, according to the latest CIA World Factbook.
In India's case, it must additionally be noted that much of its Government's borrowings is done domestically, unlike the European economies now undergoing sovereign debt crises.
The impact of their credit ratings and ‘power without responsibility' was a major factor that led to the enactment of the Dodd-Frank Act in the US last year.
The legislation stipulated an ‘expert liability' clause for the rating agencies, to make them accountable for their ratings. So far, none of the Big Three have consented to this clause, and the Securities Exchange Commission has had to extend ‘temporary waivers' indefinitely in this regard.
The SBI's credit downgrade by Moody's and its wider implications for other banks and, indeed, for the Indian economy, has to be seen in this context. Perhaps, this is an occasion to hark back to the two huge rating downgrades that India was subject to in the last 20 years, and the way it coped with them. In 1991, with barely $1 billion, or reserves sufficient for 15 days, India not only averted a default of its debt discharge obligations, but even raised $1.6 billion through the India Development Bonds. This was followed in 1998 — soon after the Pokhran II nuclear tests — when the country raised, through SBI, US$ 4.2 billion from floating Resurgent India Bonds.
The Reserve Bank of India (RBI) has, till date, not allowed a single bank collapse to cause systemic economic damage through deft handling of the New Bank of India / Global Trust Bank mergers, under the stewardship of Governors like Dr. C. Rangarajan and Dr. Y. V. Reddy (the GTB merger with OBC was sewn up on a Saturday, within 48 hours, to minimise any market reaction!).
It is probably time now for the RBI, Finance Ministry and banks such as SBI or ICICI to come together to show everyone that India has not lost its resilience, by tapping the global markets again. We can, maybe, focus on our diaspora and raise a fistful of dollars — just to prove to the Moody's of the world how wrong they are.
Or maybe tie-up with China, Singapore, Indonesia and even Pakistan — a la Chiang Mai Initiative — to launch an international rating agency that will be Asia's answer to the oligopoly of the Big Three? After all, there are very few businesses in the globe like those of the Credit Rating Agencies giving you operating profit margins of 50 per cent! Asia could very well do with such returns.
(The author is with State Bank of Mysore. Views expressed are personal.)