Bertelsmann Foundation releases report on creating an organization for sovereign-debt ratings with more transparent and comprehensive criteria
WASHINGTON, DC (April 17, 2012) - In light of the intense criticism leveled against credit rating agencies for their perceived failure to analyze adequately sovereign creditworthiness, the Bertelsmann Foundation has developed a blueprint for an international non-profit credit rating agency (INCRA), whose rating criteria are designed to increase credibility and international acceptance.
"Faulty sovereign credit ratings contributed to the most recent financial crisis that threatened a global cataclysm," said Bertelsmann Foundation President and CEO Gunter Thielen. "We need an additional, independent institution for sovereign-risk assessment, and we need to raise the quality of sovereign ratings." The INCRA proposal is the Foundation's contribution to providing a credible, practical and internationally inclusive method for increasing confidence in the financial sector and to preventing another crisis.
INCRA’s governance structure and operating procedures provide needed transparency and legitimacy. A supranational “Stakeholder Council” ensures independence by serving as a buffer between funders and the operational business. A “Credit Policy Committee” functions as a quality-control body, ensuring that ratings are grounded in a competent and comprehensive methodology.
INCRA’s financial framework is based on an endowment that provides for sustainability and security. Funding comes from a broad coalition of entities including governments, corporations, NGOs, foundations and private donors. An endowment of US$400 million is the estimated amount needed to establish and maintain INCRA, safeguard its independence, and generate sufficient annual revenue for maintaining operations.
The organization’s non-profit status helps ensure accountability and quality of ratings, which consequently minimize potential conflicts of interest. Through a network of offices in the US, Europe, Asia and Latin America, and the inclusion in INCRA's Stakeholder Council of a wider set of societal actors such as governments and civil society organizations, INCRA can gain worldwide recognition and legitimacy.
INCRA also enhances the quality of sovereign ratings by conducting risk assessments with macroeconomic and forward-looking indicators that take into account long-term socio-economic and political prospects, and potential political and social constraints on countries’ repayment abilities. These indicators comprise data developed, tested and included in the Bertelsmann Foundation’s Transformation Index and Sustainable Governance Indicators. INCRA is unique in incorporating such forward-looking indicators into its ratings methodology.
Next Steps
The Bertelsmann Foundation names the G20, which has already addressed the need for reform of credit rating agencies, as one of the best forums for garnering the political will to establish INCRA. The Foundation also calls for corporate players, NGOs and the non-profit sector to commit themselves to playing a more meaningful role, through INCRA, in the global financial sector.
The complete INCRA blueprint and an executive summary can be found at: www.bfna.org.
INCRA will also be officially presented at the 4th annual Bertelsmann Foundation – Financial Times conference in Washington, DC on Thursday, April 19, 2012. Media representatives wishing to attend the conference should RSVP to Andrew Cohen, andrew.cohen@bfna.org. For more information on INCRA or to schedule an interview with one of the authors of the INCRA blueprint, contact: Anneliese Guess, Bertelsmann Foundation, Washington, DC, anneliese.guess@bfna.org, +1.202.550.5584. Norbert Osterwinter, Bertelsmann Stiftung, Guetersloh, Germany, norbert.osterwinter@bertelsmann-stiftung.de, +49.173.289.4237.
ABOUT THE BERTELSMANN FOUNDATION:
The Bertelsmann Foundation is a private, non-partisan operating foundation, working to promote and strengthen trans-Atlantic cooperation. Serving as a platform for open dialogue among key stakeholders, the foundation develops practical policy recommendations on issues central to successful development on both sides of the ocean.
Presentation_of_"Blueprint_for_INCRA: An International Non-Profit Credit Rating Agency"
Rolf Langhammer, Vice-President, Kiel Institute for the World Economy
Vincent Truglia, Managing Director of Global Economic Research, Granite Springs Asset Management and former Managing Director, Moody’s
Moderator: Annette Heuser, Executive Director, Bertelsmann Foundation
The Bertelsmann Foundation unveiled its proposal for a new, international non-profit credit rating agency (INCRA) that would improve governance and consider non-traditional indicators of sovereign risk, at "Making a Comeback: A Return to Jobs & Growth", the Foundation's fourth annual economic conference in Washington, DC.
"We want to challenge the current system," said Annette Heuser, Bertelsmann Foundation executive director. "The first presumption we made in our model is to say sovereign ratings are public goods."
INCRA would require a US$400 million endowment, funded by governments, insurance companies, corporations, non-governmental organizations, foundations and private donors. It would have offices in Europe, North America, Latin America and Asia, connected to each other and protected by a stakeholder council from undue influence by the funders, Heuser said.
The agency aims not just to respond to the recent financial crisis, but to create a more stable international financial system when the next inevitable crisis erupts. "One thing I have learned over the decades is that by definition every crisis has to be unexpected," said Vincent Truglia, managing director of global economic research at Granite Springs Asset Management and a former Moody's managing director, who helped lead the team that created the INCRA proposal. "You have to always be thinking ahead."
"At the present time we're dealing with an unusual fiscal problem, centered at the moment on Europe, less on the United States," Truglia said, noting that to capture accurately the future risks regarding sovereign debt, one must consider forward-looking indicators as well.
The aim of the forward-looking indicators proposed in the INCRA framework is to address the political willingness of national governments to meet their debt-service obligations, not merely their financial capacity to do so, said Rolf Langhammer, vice president at the Kiel Institute for the World Economy.
"With sovereign debt and sovereign debtors you make a distinction between the capacity to serve the debt and the willingness to serve the debt. Willingness is vastly underrated," Langhammer said. "If there is a crisis, a government of course has to decide to what extent it will tax the private sector because it has to draw resources."
The new indicators draw from the Bertelsmann Transformation Index, a compilation of sustainable governance indicators, and an "enormously rich data set" on the interaction between the government and the electorate, he said.
"We want to trigger the public debate on the question of the willingness of [governments] to serve [their] debt," Langhammer said. Also, "we have forecasts on the changes of the composition of the debt between the interest and the principal of the debt."
All macroeconomic factors must be considered in context. For instance, the current account balance may not be as important for a country such as Japan, which earns tremendous investment income abroad. Or in developing nations, remittances become an important element to take into account.
In the audience question-and-answer session, Steve Young, global executive director of the Caux Round Table, praised the report for recognizing that markets can't be relied upon to accurately price debt. "What you have done is perhaps the most significant intellectual step since the crisis of 2008. If you look at all the measures that have been done from all the governments, I don't think anyone has stepped outside the box," Young said.
Another question focused on the marriage of a non-profit institution and the unconventional indicators, and what would happen if the INCRA board directed staff to abandon the forward-looking indicators. "We would have no issue with that at all," Heuser said. "There is no perfect set of indicators. In our model… the operating business of INCRA would have an expert next to it to constantly monitor the indicators. This is a work in progress."
For instance, in high-income nations the forward-looking indicators are proposed to carry greater weight, while in developing countries, the traditional macroeconomic indicators are more important. "If after two or three years our operation is running and we see we need to adjust the set of indicators, there's no problem," she said.
Langhammer stressed that the new indicators merely complement traditional macroeconomic factors that credit rating agencies use, rather than replacing them. "We're not going to substitute the old system for a new system," he said.