Moody8217;s downgrade after polls

NEW DELHI, February 12: According to indications given by a visiting team from Moody's Investors Service, when Moody's completes its review ...

NEW DELHI, February 12: According to indications given by a visiting team from Moody8217;s Investors Service, when Moody8217;s completes its review of India8217;s sovereign rating 8212; a little after the new government takes charge 8212; the country is likely to be downgraded to below investment grade.

While neither of the two-member team are directly concerned with country ratings, Michael Buneman, vice president, Developing Markets Co-ordinator, said that in 90 per cent of the cases where Moody said it was reviewing a country for a possible downgrade or upgrade, the final review also resulted in a downgrade upgrade.

Buneman said that it usually took six weeks for a final review to take place after the date of the original announcement that a review was to be made. In India8217;s case, the announcement was made on January 8. In which case, the final verdict should be out by February 22. But given the fact that the new government should be in place by mid-March, it is likely that Moody8217;s will choose to wait for a few moreweeks.

The current rating assigned by Moody8217;s to India is Baa3/P-1 with a negative outlook. A possible downgrade would mean that India would be placed below investment grade. This would significantly increase the cost of servicing the external debt and also adversely effect the flow of foreign capital into the country.

In the case of India, Moody8217;s had announced its decision to review India8217;s rating for a possible downgrade. The rating agency, it may be recalled, had earlier in March 1997 changed India8217;s outlook from stable to negative.

Just 25 companies of the 20,000 or so that Moody8217;s has rated over the last 90 years of its existence have turned defaulters in the calendar year in which they were rated as being of quot;investment gradequot;. This was stated by Richard Miller, who is Moody8217;s Managing Director 8211; Investor Services for Europe, Middle East and Africa. This, according to his colleague Michael Buneman, shows how good the quality of their ratings are. While not wishing to directly comment on thequality of ratings by various Indian companies, Buneman said that it made sense for investors to actually look behind the ratings and see how credible a company8217;s ratings were and how well they predicted a company8217;s ability to repay loans and make interest payments on time.

P K Choudhury, MD of ICRA which has a co-operation agreement with Moody8217;s, said that his agency, in fact, was doing an internal exercise along similar lines. Choudhury, however, pointed out that he didn8217;t foresee any agency in India publishing such data till they had a large enough sample.

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This could take at least 5-10 years, considering Moody8217;s started publishing its quot;default analysisquot; only 75 years after it first started operations. Rating agencies in India have come under severe flak in recent months for their failure to warn investors of fiascos such as CRB, Mid-East and ITC Classic.