A finance expert at Heriot-Watt University in Scotland is to help the United Nations shape future policy on credit ratings agencies.
Dr Patrycja Klusak, an expert in credit ratings agencies and Professor of Accounting and Finance at the University’s Edinburgh Business School, has been invited to present at a high level closed meeting in New York this week.
The event, at the United Nations University Centre for Policy Research, will explore the role of credit rating agencies in international finance, including their impact on developing countries.
Credit rating agencies are companies that assess the creditworthiness of financial institutions, companies and governments.
“The ratings applied to a country’s financial health are hugely important because they help that country – and its banks and businesses – to access capital and borrow money at affordable rates,” Dr Klusak explains. “They also underpin direct investment flows into big national projects and affect the efficiency and stability of capital markets across borders.”
The United Nations University Centre for Policy Research is a UN think tank that carries out policy-focused research on issues of strategic interest and importance to the UN and its 193 member states.
In its briefing for the event, the Centre says: “In Africa, it is estimated that $74.5 billion could be saved if ratings from international credit rating agencies were fairer and more objective. These perceptions of credit ratings and have sparked new approaches to credit ratings and, in some cases, proposals for new credit rating institutions.”
Ghana’s President, Nana Akufo-Addo, has also said that credit ratings can turn “liquidity crises into solvency crises,” the Centre adds.
Dr Klusak explains: “Ratings are opinions about the likelihood of a country defaulting on its debt – and as we don’t have a crystal ball, they might not always be what we expect. This doesn’t necessarily imply that ratings are biased. But it does highlight why the credit rating process and the data analysis around it needs to be more scientifically linked to the performance of individual economies – in a way that perhaps hasn’t been done before.”
Earlier this year, Dr Klusak co-authored research with Norwich Business School at the University of East Anglia and Bangor Business School at Bangor University about the impact on credit ratings of ‘soft’ information – for example, a discussion with the country about its financial prospects and management policies – in addition to hard economic or fiscal data, such as gross domestic product. This component of ratings might be seen as ‘favouritism’ towards developed European economies. It can lead to ratings agencies consciously or unconsciously inflating the ratings of particular countries, with developing countries potentially disadvantaged.
The United Nations University Centre for Policy Research says governments and multilateral institutions have “expressed concern and discontent” with the functioning of the current international financial system, which is seen as “outdated, biased, and slow to adapt to new challenges.”
The event, The Role of Credit Rating Agencies in the International Financial Architecture, will help to shape policy around the future role of credit ratings agencies in international finance.
Dr Klusak will address the event’s first session, which will introduce the subject and set the scene, exploring the role of credit rating agencies in the context of international financial reform.
Dr Klusak has been researching the behaviour and regulation of credit ratings agencies for more than ten years. Her work also explores climate and biodiversity loss and its effect on future credit ratings of countries. She is an Affiliated Researcher at the Bennett Institute for Public Policy, a public policy research institute at the University of Cambridge, visiting Professor at Bennett Institute for Innovation and Policy at Sussex University, and a theme lead at the ClimaTraces lab at Kings College, Cambridge University.
