The S&P a global rating agency is very much in the news these days. It has prepared a report, which indicates that India can loose its investment grade rating. It points, along with other indicators, that the Indian economy is not performing well and is in fact slowing down.
What is S&P and why its ratings are so important?
The Standard & Poor (S&P), is a global financial rating agency, with headquarters in New York, USA. It is owned by The McGraw-Hill Companies, famous publishers of textbooks and variety of reports.
It was founded in 1860, when Henry Vamum Poor published the
In 1906, both of them merged to form Standard & Poor and were acquired by McGraw-Hill in 1941. S&P is now a full fledged Credit Rating Agency and rates both private and public companies. It also issues country ratings. It issues both long and short term ratings.
Its long term ratings are Investment Grade and Non-Investment Grade
The long term investment grade ratings are as follows:
AAA indicates extremely strong capacity to fulfill its financial commitments.
AA indicates very strong capacity to meet its financial commitments.
AA+ very low credit risk but can be susceptible to long term risks
A indicates has strong capacity but can be affected by adverse economic conditions
when compared to higher rated borrowers.
BBB adequate capacity but can be adversely affected by changing economic conditions
weakening its economy and capacity.
The Non-Investment Grade ratings are as follows:
BB less vulnerable in near term but can get weakened by adverse economic
B more vulnerable than BB rated category.
CCC currently vulnerable
CC currently highly vulnerable
C highly vulnerable but meeting its current obligations
R under regulatory supervision
SD has selectively defaulted.
D has defaulted on most obligations
NR not rated
On Aug 5, 2011, S&P downgraded USA from AAA to AA grade. On Nov 11, 2011 it cut the rating of France from AAA to AA. Both countries protested, but S&P did not restore the ratings. Eight European countries were also downgraded on Nov. 11, 2011.
India’s present rating is BBB in the investment grade and if it is downgraded to BB it will come in the non-investment grade. This will mean that many foreign investors may withhold their investments in India and divert them elsewhere. Furthur the cost of international borrowings can also go up.
The S&P ratings are a very important decision making tool in the international world of finance. A downgrading in ratings is factored into by investment agencies when planning investments in a country or a firm. The ratings are based on models developed by S&P which take into account numerous variables and their effects. Thus the well researched and studied reports and ratings are taken seriously by all concerned.
It is in India’s interest to take the S&P report seriously and take suitable steps to revive the economy at the earliest instead of entering into arguments with the globally respected agency.