Non-Profit Credit Rating Agency
“The Political Momentum Is There Now”
Annette Heuser, Director of the Bertelsmann Foundation North America, and Daniel Schraad-Tischler, SGI Project Manager, discuss INCRA – a new international non-profit credit rating agency.
SGI News: Ms Heuser, Mr Schraad-Tischler, what was the motivation of the Bertelsmann Stiftung in developing the concept of a new rating agency in the form of INCRA (International Non-profit Credit Rating Agency)?
Annette Heuser: When a number of European countries were downgraded in September 2011 by the big three American rating agencies Standard & Poor’s, Moody’s and Fitch, the discussion surrounding many issues raised by the financial crisis, and which the Bertelsmann Stiftung had been engaged with for a long time, came to a head. Moreover, the call for a European rating agency became ever louder. It was not only Europeans who were questioning how much influence the US agencies – who make up 95 percent of the market – have, and the quality of their ratings. Rather, the emerging economies in Latin America and Asia were asking the same questions. It is an international problem. For that reason, we decided to develop a recommendation for a new rating agency that draws on more than the traditional macroeconomic criteria in relation to the quality of its ratings. We have many years of experience with the Bertelsmann Stiftung Transformation Index (BTI) and Sustainable Governance Indicators (SGI), which measure the performance of states in relation to indicators that illustrate socio-economic development.
Daniel Schraad-Tischler: From the perspective of our SGI project, we immediately found Annette Heuser’s idea of an independent, international rating agency quite exciting and, with regard to the current crisis conditions, more than necessary. A ratings monopoly simply cannot satisfy the current and future needs of the financial markets, of politics and of the public, in relation to reliable, independent and transparent ratings. The INCRA concept, with its innovative governance structure and novel methodological approach, will fill a gaping hole – ultimately, reliable country ratings are a public good.
SGI News: What is the INCRA concept precisely?
Heuser: The basic concept of INCRA contains three elements: First, it provides an international answer to the monopoly of the three big rating agencies. Secondly, the country analyses are decoupled from the company analyses and transferred to a non-profit oriented agency. Thirdly, so-called forward-looking indicators, which illustrate the socio-economic development of a country, are drawn on in addition to the macroeconomic criteria for a rating.
Schraad-Tischler: It was clear to us from the outset that a new, innovative ratings concept should not be based solely on established macroeconomic indicators. The question of whether a country is in a position to repay its debt, now and in the future, depends on many socio-economic and political factors. It is these aspects that we are trying to bring into view with the forward-looking indicators. We have tested the bulk of these over many years, as part of the SGI and BTI. Here, the question is one of the reliability and predictability of government dealings: How do things look in relation to legal protection, corruption, and the effectiveness of political institutions?
SGI News: Can you talk us through the development of INCRA in detail?
Heuser: We formed two working groups. One concentrated on how the governance structure of the new institution should look, in order to increase the transparency and accountability of those responsible. The second team concentrated on the measurement of the political performance of countries. In addition to that, we involved experts such as Rolf Langhammer, Vice President of the Kiel Institute for the World Economy. Together, we developed a new set of criteria and tested it with investors all over the world.
Schraad-Tischler: The development of the forward-looking indicators, for example, involved not only employees of the Bertelsmann Stiftung, but also renowned financial market experts such as Vincent J. Truglia, who was responsible for the country ratings area of rating agency Moody’s for many years. The overall concept of INCRA goes far beyond the established indicator sets used by the three big American rating agencies.
SGI News: How do you see your initiative positioned in comparison to other efforts to construct a new rating agency?
Heuser: At the moment, unfortunately, there are not very many alternative concepts. The management consultancy Roland Berger is in the process of building a European rating agency that is structured completely differently than ours. In contrast to Roland Berger, as a think tank and foundation we do not view it as our task to actually implement the proposal. It is up to others, and first and foremost to states, to give life to the concept. At the moment, however, not enough competitors can enter the market in order to pressure the large agencies to reform.
SGI News: What has been the reaction to INCRA so far?
Heuser: We are the first to have put forward a market-ready blueprint for a new rating agency. The concept has had significant and positive resonance worldwide, both in the media and with governments in Europe and across the world. We are now in the process of discussing the concept further with political and business stakeholders, in order to bring this new institution to life.
SGI News: Is politics really ready for it, in your view?
Heuser: The political momentum is now there. There is speculation in the media almost daily about possible downgrades of European countries by the US agencies. The unanswered question is whether the strain on governments – including in Germany, France and the USA – is significant enough for them to say: Yes, we would like to create an alternative, an international, transparent institution that raises the quality of the ratings. We will see in the coming months.
Interview: SGI News
Translated from German by Rogan O’Shannessy