Standard & Poor (s&p) The Global Rating Agency In Brief

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

History of Railroads and Canals in the United States. Along with his son, he later on established H.V. and H.W. Poor Co, and continued publishing the annually updated versions of the book. In 1906, Luther Lee Blake founded the Standard Statistic Bureau, for providing financial information on non rail road companies.

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.

Article Written By vks1000

Am a retired professional who is now into education of International Business and management topics. I enjoy writing and like reading on politics,economics,management and films. I take life as it comes and try to keep myself busy with a variety of activities.

Posted on 13-06-2012 48 0

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