Three for-profit US companies continue to control the fate of nations through “aggressive downgrades” that worsen financial crises argues Jasper Hamann.
The Africa Sovereign Credit Rating Review concluded that Fitch, Moody’s, and S&P are disproportionately “aggressive” with African nations.
Three private credit rating agencies in New York are worsening the economic consequences of the pandemic in Africa. A new report by the African Union (AU) shows that “aggressive downgrades” from US credit rating firms have impaired government abilities to raise funds. The Africa Sovereign Credit Rating Review concluded that Fitch, Moody’s, and S&P are disproportionately “aggressive” with African nations.
Private firms, global impact
Credit ratings for sovereign debt has become a standard that international lenders use to determine how likely it is for a country to repay its debts. The ratings issued in New York have grave implications for the nations involved as these ratings directly influence how much interest they pay on new bonds issued in foreign currencies.
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There are a mere three agencies worldwide who issue these ratings for Africa and the world, and they are all based in New York. These private for-profit businesses have been either involved in, or partly responsible for most of the major financial crises of the last decades. They were at the center of the Asian financial crisis in the late 1990s, the Enron scandal in 2001, and notoriously in the 2008 global financial crisis.
These firms continued to yield disproportionate power over the fate of nations despite a history of accusations of issuing false ratings, acting on political bias, and selective aggression, among other highly problematic behavior. The selective aggression these private entities apply comprised a large part of Africa’s just criticism of the current credit rating status quo.
Fitch, Moody’s, and S&P view the world through a lens of neoliberal economics and in turn reward or punish nations for their domestic policies. Deregulating business, cutting taxes on multinationals, and cutting social benefits can have a nation upgraded, while spending tax revenues on citizens’ healthcare or welfare can see a country’s ratings plummet.
Worsening COVID-19 crisis
The African Union’s new report is accusing the US-based credit rating firms of again negatively impacting the abilities of countries in Africa to issue bonds on the international financial market. The report described credit downgrades as a “self-fulfilling prophecy”: A downgrade effectively worsens a country’s financial options and in turn worsens its economic outlook.
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Amid the COVID-19 crisis that has enveloped the entire globe in economic distress, five nations in Africa were forced to cancel their planned issuing of Eurobonds after these US-based firms “aggressively downgraded” them. This meant countries had less to spend on vital, and often life-saving, healthcare and economic stimulus amid the spread of COVID-19.
The approach the for-profit rating firms use is “procyclical,” meaning that “bad news is simply piled on bad news,” according to the report. The three firms therefore yield tremendous influence on the economic futures of entire nations, with little to no oversight.
The AU accuses the three firms of punishing Cameroon and Ethiopia for participating in a debt service freeze. The freeze intended to help the countries but resulted in greater difficulty to access international funds due to the downgrades. The downgrade “lacks objectivity” and worsened the country’s ability to deal with the pandemics of economic and public health fallout.
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Furthermore the credit rating agencies punished nations in Africa for increased spending in the midst of a crisis. While countries were struggling to save lives and provide modest economic support to citizens, the US-based firms punished them by downgrading them and impairing their ability to access international funds.
Morocco’s recent downgrade
While not featured in the AU’s report, Morocco’s recent downgrades provide apt examples of this highly problematic practice. Last Friday, Fitch Ratings downgraded Morocco’s default rating to “junk bond” for its plans to increase pensions and expand healthcare. Like many other countries in Africa, the credit rating agency actively penalized Morocco.
Even though Morocco’s planned healthcare spending would still be well below the WHO’s recommended level of 12% of GDP, the ratings agency punished the country for the decision. While nations in the West have spent trillions on economic stimulus and social support, many received no or only slight downgrades from the US-based agencies.
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Fitch provided a commentary on its downgrade that was rife with contradictions. It commended the government for its initiatives, while citing increased healthcare spending and social benefits as reasons for its aggressive downgrade.
Morocco now has a Fitch rating as “junk bond” for seeing its deficit rise from 4.1% to 7.9%. In contrast, the US has a deficit of 15.2%, its greatest deficit since WW2, yet Fitch continues to issue the country with AAA ratings despite describing its outlook as negative.
The problematic abuse of ratings agencies with no avenues for recompense or ways to keep these private firms accountable continues to worsen economics on the African continent. Amid a devastating public health crisis with deep economic consequences, these private firms are reaping economic havoc with little to no accountability for the suffering they cause.
Kelechi Deca
Kelechi Deca has over two decades of media experience, he has traveled to over 77 countries reporting on multilateral development institutions, international business, trade, travels, culture, and diplomacy. He is also a petrol head with in-depth knowledge of automobiles and the auto industry