Demystifying Moody's

WAS Moody's rating of India, as finance minister Yashwant Sinha petulantly described it, too harsh and overcautious? The latter, yes, because a rating agency's business is to act as a weathervane. And Moody's had burnt its fingers pretty badly in its earlier ratings of Asian countries. So much so that even in May, it put out a very pessimistic analysis of Asia's economies. "It will really get worse," said the analysis, "before it gets better, and that is why we have Korea rated at Ba1. It isn't ready to join the ranks of investment-grade issuers. Things in Thailand are much the same and...Indonesia will, in effect, spend 1998 probably accomplishing very little in the way of necessary reform." About Japan, too, the report felt that without East Asian markets for exports, the Japanese might find little scope for immediate improvement.

Which is why, experts wonder, why is India's sovereign debt rated lower than, say, Korea or Thailand? Especially since in the case of both these countries, long-term bank deposits are rated lower than India's? Korea's Caa1 rating denotes "poor standing" and "likelihood of default", while Thailand's B1 deposits, at a grade higher, are not "desirable investment".

There might be two reasons for this. Both these countries' sovereign long-term debt is rated only a notch higher than India's—all are considered speculative investment—and the current quibbling might be merely technical. After all, Moody's had indicated a downgrade in January, the bad budget just sparked off a slide.

The second, and more acceptable, basis for the overcaution lies in a white paper the agency issued in April analysing where it might have gone wrong about East Asia and concluding in favour of a new "ratings world order". The new approach, the analysts argued, "requires a greater appreciation of the risks posed by a weak banking system on a developing country, the identity and likely behaviour of foreign short-term creditors, and increased sensitivity to the risk that a financial crisis in one country may be contagious for its neighbours". It is easy to understand, then, why Moody's decided on a double demotion for India.